Simple and compound interest

Front

What is simple interest?

Back

Simple interest is calculated only on the principal amount, or the original amount of money borrowed or invested.

Front

What is compound interest?

Back

Compound interest is calculated on the principal amount and also on the interest that has been added to it over time.

Front

What is the formula for calculating simple interest?

Back

Simple Interest = Principal × Rate × Time.

Front

What is the formula for calculating compound interest?

Back

A = P(1 + r)^t, where A is the total amount, P is the principal, r is the rate, and t is the time.

Front

In the compound interest formula, what does 'P' represent?

Back

'P' represents the principal amount, or the initial amount of money invested or borrowed.

Front

In the compound interest formula, what does 'r' represent?

Back

'r' represents the annual interest rate (in decimal form).

Front

In the compound interest formula, what does 't' represent?

Back

't' represents the time the money is invested or borrowed for, usually in years.

Front

What does 'A' represent in the compound interest formula?

Back

'A' represents the total amount of money accumulated after n years, including interest.

Front

If you invest $1,000 at a 5% simple interest rate for 3 years, how much interest will you earn?

Back

Interest = 1000 × 0.05 × 3 = $150.

Front

If you invest $1,000 at a 5% compound interest rate for 3 years, how much will you have at the end?

Back

A = 1000(1 + 0.05)^3 = $1157.63.