Simple and compound interest

Front

What does the 'P' represent in the compound interest formula?

Back

The 'P' represents the principal, which is the amount of money borrowed or deposited.

Front

What does the 't' represent in the compound interest formula?

Back

The 't' represents time.

Front

What is the definition of interest?

Back

Interest is money paid to you by a bank for the money you have in a bank account.

Front

How do you calculate the total amount after 3 years with a principal of $4,000 at a 2% compound interest rate?

Back

The total amount after 3 years is $4,244.83.

Front

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

Back

To convert a percentage to a decimal, divide the percentage by 100.

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, 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.

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 and also on the accumulated interest from previous periods.

Front

If you invest $1,000 at an annual interest rate of 5% compounded annually, how much will you have after 5 years?

Back

You will have $1,276.28 after 5 years.

Front

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

Back

The more frequently interest is compounded, the more total interest will be earned.

Front

What is the principal amount in a loan?

Back

The principal amount is the initial sum of money borrowed or invested, excluding interest.