Simple and compound interest

Front

What is simple interest?

Back

Simple interest is the interest calculated on the principal amount only, without compounding.

Front

What is the formula for calculating simple interest?

Back

The formula for simple interest is I = Prt, where I is the interest, P is the principal, r is the rate of interest per year, and t is the time in years.

Front

If you have a principal of $1000, a rate of 5%, and a time of 3 years, how much simple interest will you earn?

Back

You will earn $150 in simple interest.

Front

What is compound interest?

Back

Compound interest is the interest calculated on the initial principal, which also includes all of the accumulated interest from previous periods.

Front

How does compound interest differ from simple interest?

Back

Compound interest is calculated on the total amount (principal + interest) at each compounding period, while simple interest is calculated only on the principal.

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, n is the number of times that interest is compounded per year, and t is the number of years.

Front

What does it mean to compound interest annually?

Back

Compounding interest annually means that the interest is calculated and added to the principal once per year.

Front

What is the effect of increasing the compounding frequency on compound interest?

Back

Increasing the compounding frequency (e.g., from annually to semi-annually or quarterly) results in more interest being earned over the same period.

Front

If you invest $2000 at an annual interest rate of 6% compounded quarterly for 5 years, how much will you have?

Back

You will have approximately $2,653.30 after 5 years.

Front

What is the total amount to be paid back if $1200 is borrowed at 8% simple interest for 2 years?

Back

The total amount to be paid back is $1,392.