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 does compounding frequency affect the amount of compound interest earned?

Back

The more frequently interest is compounded, the more interest will be earned on the initial principal and accumulated interest, leading to a higher total 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, 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 annual compounding and semi-annual compounding?

Back

Annual compounding means interest is calculated once a year, while semi-annual compounding means interest is calculated twice a year, resulting in more interest earned in the latter.

Front

If an investment earns 5% interest compounded annually, how much will $1,000 grow in 10 years?

Back

Using the formula A = P(1 + r/n)^(nt), A = 1000(1 + 0.05/1)^(1*10) = $1,628.89.

Front

What is the impact of a higher interest rate on compound interest?

Back

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

Front

How do you calculate the total amount after a certain number of years with compound interest?

Back

You can calculate the total amount by using the compound interest formula A = P(1 + r/n)^(nt) and substituting the values for principal, rate, compounding frequency, and time.

Front

What is the significance of the principal amount in compound interest calculations?

Back

The principal amount is the initial sum of money invested or loaned, and it is the base on which interest is calculated.

Front

What does it mean for interest to be compounded quarterly?

Back

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

Front

How can you determine the total interest earned on an investment?

Back

Total interest earned can be determined by subtracting the principal from the total amount after interest has been applied: Total Interest = A - P.