Compound and Simple Interest

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 (the initial amount of money), 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 'simple interest' mean?

Back

Simple interest is calculated only on the principal amount, or on that portion of the principal amount which remains unpaid. The formula is I = PRT, where I is the interest, P is the principal, R is the rate of interest per year, and T is the time in years.

Front

What is the difference between compound interest and 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 does 'compounded annually' mean?

Back

Compounded annually means that the interest is calculated and added to the principal once a year.

Front

If an investment of $1000 is made at an interest rate of 5% compounded annually for 3 years, what will be the total amount?

Back

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

Front

What does 'semi-annually' mean in terms of compounding?

Back

Semi-annually means that interest is calculated and added to the principal twice a year.

Front

How do you calculate the total amount to be paid back on a loan with simple interest?

Back

Total Amount = Principal + Interest, where Interest = Principal x Rate x Time.

Front

What is the future value of an investment of $5000 at an interest rate of 3.75% compounded monthly for 25 years?

Back

Future Value = $12,749.30.

Front

What is the formula for calculating the future value of an investment compounded quarterly?

Back

A = P(1 + r/4)^(4t), where r is the annual interest rate.

Front

If Olivia spends $7400 on furniture with 9.5% interest compounded quarterly for 8 years, how much will she pay in total?

Back

Total Amount = $15,683.28.