Compound interest

Front

What is the formula for calculating compound interest?

Back

A = P(1 + r/n)^(nt), where A is the amount of money accumulated after n years, including interest, P is the principal amount, r is the annual interest rate (decimal), n is the number of times that interest is compounded per year, and t is the number of years the money is invested or borrowed.

Front

In the compound interest formula, what does 'P' represent?

Back

'P' represents the principal amount, which is the original amount of money invested or borrowed.

Front

In the compound interest formula, what does 'r' stand for?

Back

'r' stands for the annual interest rate expressed as a decimal.

Front

In the compound interest formula, what does 'n' represent?

Back

'n' represents the number of times that interest is compounded per year.

Front

In the compound interest formula, what does 't' stand for?

Back

't' stands for the number of years the money is invested or borrowed.

Front

If $3,000 is invested at an interest rate of 2.9% compounded quarterly, how would you set up the equation to find the total amount after 10 years?

Back

A = 3000(1 + 0.029/4)^(4*10) where 0.029 is the decimal form of 2.9%.

Front

What is the future value of an investment of $5,000 at an interest rate of 3.75% compounded monthly for 25 years?

Back

The future value is $12,749.30.

Front

How do you convert a percentage interest rate to a decimal for use in the compound interest formula?

Back

To convert a percentage to a decimal, divide the percentage by 100. For example, 6.75% becomes 0.0675.

Front

What is the effect of increasing the frequency of compounding on the total amount of interest earned?

Back

Increasing the frequency of compounding (e.g., from annually to semi-annually or quarterly) results in more interest being earned, as interest is calculated on previously earned interest.

Front

If an investment earns 6.75% interest compounded semi-annually, what is the value of 'n' in the compound interest formula?

Back

'n' is 2, since interest is compounded twice a year.