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

What is the formula for calculating compound interest?

Back

The formula 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 the money is invested or borrowed.

Front

What does 'principal' mean in finance?

Back

Principal refers to the initial sum of money invested or loaned, before interest.

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 already been added.

Front

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

Back

After 3 years, you will have $1,157.63.

Front

What is the effect of compounding frequency on the amount of compound interest earned?

Back

The more frequently interest is compounded, the more interest will be earned, as interest is calculated on previously accumulated interest.

Front

What is an emergency fund?

Back

An emergency fund is a savings account that is set aside to cover unexpected expenses or financial emergencies.

Front

Why is it not advisable to keep your emergency fund in a single stock?

Back

Keeping an emergency fund in a single stock is risky because the value of the stock can fluctuate significantly, potentially leading to losses when you need the funds.

Front

What is the future value of an investment?

Back

The future value of an investment is the amount of money that an investment will grow to over a period of time at a given interest rate.

Front

How does inflation affect the value of money over time?

Back

Inflation decreases the purchasing power of money over time, meaning that the same amount of money will buy fewer goods and services in the future.