Compound Interest Practice

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 different from simple interest?

Back

Compound interest is calculated on the initial principal and also on the accumulated interest of previous periods, while simple interest is calculated only on the principal amount.

Front

What is the formula for calculating compound interest?

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, 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.

Front

If $7,400 is borrowed at an interest rate of 9.5% compounded quarterly, how much will be owed after 8 years?

Back

$15,683.28

Front

What does it mean for interest to be compounded quarterly?

Back

Compounding quarterly means that the interest is calculated and added to the principal four times a year.

Front

Convert 25% to a decimal.

Back

0.25

Front

If $5,000 is invested at an interest rate of 3.75% compounded monthly for 25 years, what will the future account balance be?

Back

$12,749.30

Front

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

Back

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

Front

How much will $200 grow to at a 20% annual interest rate compounded annually over 40 years?

Back

$293,954.

Front

Which investment option yields a larger balance after 5 years: 4% compounded monthly or 3.9% compounded daily?

Back

4% compounded monthly.