simple and compound interest

Front

What is simple interest and how is it calculated?

Back

Simple interest is calculated using the formula: I = PRT, where I is the interest, P is the principal amount, R is the rate of interest per year (as a decimal), and T is the time in years.

Front

How do you convert a percentage to a decimal for interest calculations?

Back

To convert a percentage to a decimal, divide the percentage by 100. For example, 3% becomes 0.03.

Front

What is the formula for calculating the total amount in an account with simple interest?

Back

The total amount A in an account with simple interest is calculated using the formula: A = P + I, where I is calculated as I = PRT.

Front

What is compound interest and how does it differ from simple interest?

Back

Compound interest is calculated on the initial principal and also on the accumulated interest from previous periods. Unlike simple interest, which is only calculated on the principal, compound interest grows faster over time.

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

How does the frequency of compounding affect the total amount in an account?

Back

The more frequently interest is compounded, the more interest will be earned on the account. For example, compounding annually will yield less than compounding semi-annually or quarterly.

Front

If an account earns 6% simple interest, how much interest will be earned on a $1,000 investment after 5 years?

Back

Using the formula I = PRT, the interest earned will be I = 1000 * 0.06 * 5 = $300.

Front

What is the difference between nominal and effective interest rates?

Back

The nominal interest rate is the stated interest rate on a loan or investment, while the effective interest rate takes into account the effects of compounding during the year.

Front

How do you determine which investment will yield more money after a certain period?

Back

To determine which investment yields more, calculate the total amount for each investment using the appropriate interest formula (simple or compound) and compare the results.

Front

What is the impact of time on the growth of an investment with compound interest?

Back

The longer the money is invested, the more significant the impact of compounding becomes, leading to exponential growth of the investment.