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 is Compound Interest calculated?

Back

Compound Interest = P(1 + r/n)^(nt) where P = principal amount, r = annual interest rate (decimal), n = number of times interest applied per time period, t = number of time periods.

Front

What does 'compounded annually' mean?

Back

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

Front

If you invest $1,000 at an interest rate of 5% compounded annually, how much will you have after 3 years?

Back

$1,157.63

Front

What is the formula for calculating the total amount after compound interest?

Back

Total Amount = P(1 + r/n)^(nt) where P is the principal, r is the interest rate, n is the number of times interest is compounded per year, and t is the number of years.

Front

What is the principal in a compound interest problem?

Back

The principal is the initial amount of money that is invested or loaned.

Front

What is the effect of increasing the interest rate on compound interest?

Back

Increasing the interest rate will result in a higher total amount due to more interest being earned on the principal.

Front

How does the frequency of compounding affect the total amount?

Back

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

Front

If you have $2,000 at an interest rate of 6% compounded annually, what will it be worth after 5 years?

Back

$2,686.65

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 plus any accumulated interest.