Compound Interest and Simple 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

What is the formula for calculating simple interest?

Back

I = Prt, where I is the interest, P is the principal amount, r is the annual interest rate (decimal), and t is the time in years.

Front

What is the difference between compound interest and 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

How does the frequency of compounding affect the total amount of compound interest earned?

Back

The more frequently interest is compounded, the more interest will be earned on the investment, leading to a higher total amount.

Front

If you invest $1,000 at an interest rate of 5% compounded annually for 3 years, what will be the total amount?

Back

A = 1000(1 + 0.05/1)^(1*3) = $1,157.63.

Front

What is the total interest paid on a loan of $10,000 at a 6% simple interest rate over 5 years?

Back

I = Prt = 10000 * 0.06 * 5 = $3,000.

Front

What is the principal amount in the context of interest calculations?

Back

The principal amount is the initial sum of money that is either invested or borrowed, before any interest is applied.

Front

What does the term 'compounding period' refer to?

Back

The compounding period is the frequency with which interest is calculated and added to the principal balance, such as annually, semi-annually, quarterly, or monthly.

Front

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

Back

To convert a percentage to a decimal, divide the percentage by 100. For example, 5% becomes 0.05.

Front

What is the effect of a higher interest rate on the total amount of compound interest earned?

Back

A higher interest rate increases the amount of interest earned over time, leading to a larger total amount.