Compound Interest Formula

Front

What is the Compound Interest Formula?

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 (the initial amount of money), 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 does 'n' represent in the Compound Interest Formula?

Back

'n' represents the number of times interest is compounded per year.

Front

If interest is compounded annually, what is the value of 'n'?

Back

'n' = 1.

Front

If interest is compounded semi-annually, what is the value of 'n'?

Back

'n' = 2.

Front

If interest is compounded quarterly, what is the value of 'n'?

Back

'n' = 4.

Front

How do you convert a percentage to a decimal?

Back

To convert a percentage to a decimal, divide by 100. For example, 55% = 55/100 = 0.55.

Front

What does 'r' stand for in the Compound Interest Formula?

Back

'r' stands for the annual interest rate expressed as a decimal.

Front

Calculate the total amount for an investment of $10,000 at an interest rate of 5% compounded annually for 3 years.

Back

A = 10000(1 + 0.05/1)^(1*3) = $11,576.25.

Front

What is the effect of compounding frequency on the total amount?

Back

The more frequently interest is compounded, the more interest will be earned on the investment. For example, quarterly compounding will yield more than annual compounding.

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 interest that has been added to it.