Compound Interest

Front

What is compound interest?

Back

Compound interest is the interest on a loan or deposit calculated based on both the initial principal and the accumulated interest from previous periods.

Front

How is compound interest different from simple interest?

Back

Compound interest is calculated on the initial principal and also on the accumulated interest of previous periods, while simple interest is calculated only on the principal amount.

Front

What is the formula for calculating compound interest?

Back

The formula for compound interest is A = P(1 + r/n)^(nt), where A is the amount of money accumulated after n years, 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.

Front

What does 'compounded quarterly' mean?

Back

Compounded quarterly means that the interest is calculated and added to the principal four times a year.

Front

If you deposit $5000 at an interest rate of 1.5% compounded quarterly for 3 years, what is the balance?

Back

The balance after 3 years would be $5,229.70.

Front

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

Back

The more frequently interest is compounded, the more interest will be earned, as interest is calculated on previously accumulated interest.

Front

How do you convert an annual interest rate to a quarterly interest rate?

Back

To convert an annual interest rate to a quarterly interest rate, divide the annual rate by 4.

Front

What is the ending balance after depositing $1200 at 3% interest compounded monthly for one year?

Back

The ending balance after one year would be $1,236.50.

Front

How do you calculate the total interest earned on an investment?

Back

Total interest earned can be calculated by subtracting the principal amount from the final balance (A - P).

Front

What is the total interest earned on an investment of $9,875 at 4.8% compounded monthly over 12 years?

Back

The total interest earned would be approximately $7,457.95.