Compound Interest

Front

What is the formula for calculating the total amount (A) in a compound interest account?

Back

A = P(1 + r)^t, where P is the principal amount, r is the interest rate, and t is the time in years.

Front

In the compound interest formula A = P(1 + r)^t, what does 'P' represent?

Back

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

Front

How do you calculate the interest earned in a compound interest account?

Back

Subtract the principal amount (P) from the total amount (A) after compounding: Interest = A - P.

Front

If an account has a principal of $1000, an interest rate of 5%, and is compounded annually for 3 years, what is the total amount?

Back

A = 1000(1 + 0.05)^3 = $1157.63.

Front

What is the effect of increasing the interest rate on the total amount in a compound interest account?

Back

Increasing the interest rate will result in a higher total amount due to more interest being earned over time.

Front

If you invest $2000 at an interest rate of 4% compounded annually for 10 years, how much interest will you earn?

Back

A = 2000(1 + 0.04)^10 = $2965.34, so interest earned = $2965.34 - $2000 = $965.34.

Front

What happens to the total amount in a compound interest account if the time period is doubled, assuming the interest rate remains the same?

Back

The total amount will increase significantly due to the effect of compounding over a longer period.

Front

What is the difference between simple interest and compound interest?

Back

Simple interest is calculated only on the principal amount, while compound interest is calculated on the principal plus any interest that has been added to it.

Front

How does compounding frequency (e.g., annually, semi-annually, quarterly) affect the total amount in a compound interest account?

Back

More frequent compounding results in a higher total amount because interest is calculated and added to the principal more often.

Front

If Jacob borrows $500 at an interest rate of 2.5% compounded annually for 5 years, how much will he owe?

Back

A = 500(1 + 0.025)^5 = $565.70.