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 does the term 'Principal' refer to in compound interest?

Back

Principal refers to the initial amount of money deposited or invested before interest.

Front

What does 'Rate of Interest' mean?

Back

The rate of interest is the percentage at which interest is calculated on the principal, usually expressed annually.

Front

What does 'Time' represent in the context of compound interest?

Back

Time refers to the duration for which the money is invested or borrowed, typically measured in years.

Front

What does 'Compounding Frequency' mean?

Back

Compounding frequency is how often the accumulated interest is added to the principal, affecting the total amount of interest earned.

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, n is the number of times interest is compounded per year, and t is the number of years.

Front

If $1,000 is invested at an interest rate of 5% compounded annually for 3 years, what is the total amount?

Back

A = 1000(1 + 0.05/1)^(1*3) = $1,157.63.

Front

What does 'Annually' mean in terms of compounding?

Back

Annually means that interest is compounded once a year.

Front

If an investment of $2,000 earns 4% interest compounded quarterly, what is the total amount after 5 years?

Back

A = 2000(1 + 0.04/4)^(4*5) = $2,208.40.

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.