Simple & Compound Interest

Front

What is Simple Interest?

Back

Simple Interest is calculated using the formula: I = P * r * t, where I is the interest, P is the principal amount, r is the rate of interest per year, and t is the time in years.

Front

What is Compound Interest?

Back

Compound Interest is calculated on the initial principal and also on the accumulated interest from previous periods. 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, r is the annual interest rate, n is the number of times that interest is compounded per year, and t is the number of years.

Front

How do you calculate the total amount paid on a loan with compound interest?

Back

To calculate the total amount paid on a loan with compound interest, use the formula A = P (1 + r/n)^(nt). The total amount paid is A, which includes the principal and the interest.

Front

What is the principal in an investment or loan?

Back

The principal is the amount of money borrowed or deposited.

Front

How do you convert an interest rate into a decimal?

Back

To convert an interest rate into a decimal, divide the percentage by 100. For example, 5% becomes 0.05.

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.

Front

If you invest $1,000 at a 5% simple interest rate for 4 years, how much interest will you earn?

Back

You will earn $200 in interest, calculated as I = P * r * t = 1000 * 0.05 * 4.

Front

If you invest $1,000 at a 5% compound interest rate compounded annually for 3 years, what will be the total amount?

Back

The total amount will be $1,157.63, calculated using A = P (1 + r/n)^(nt) = 1000(1 + 0.05/1)^(1*3).

Front

What is the formula for calculating compound interest?

Back

The formula for calculating compound interest is A = P (1 + r/n)^(nt).

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.