Mastering Compound Interest Concepts

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 calculated?

Back

Compound interest is calculated using the formula: 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 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 annual interest rate of 5% compounded annually, how much will you have after 3 years?

Back

Using the formula A = P(1 + r/n)^(nt), A = 1000(1 + 0.05/1)^(1*3) = $1157.63.

Front

What is the principal amount if $205 is earned as compound interest at a 5% annual interest rate after 2 years?

Back

Using the formula for compound interest, the principal amount is $2000.

Front

What is the formula for calculating the total amount in a compound interest account after a certain number of years?

Back

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

Front

How much interest will be earned on a $1,500 deposit at 7% annual compound interest after 3 years?

Back

The interest earned will be $337.56.

Front

If Anika chooses a 5% simple interest option for 3 years on $1,000, how much interest will she earn?

Back

Anika will earn $150 in simple interest.

Front

What is the effect of compounding frequency on compound interest?

Back

The more frequently interest is compounded, the more interest will be earned over time.

Front

If Tom and Ryan both invest $3,500 for 6 years, and Tom earns more due to a higher interest rate, how much more will he have?

Back

Tom will have $83.77 more than Ryan.