simple and compound interest

Front

What is simple interest?

Back

Simple interest is calculated on the principal amount only, using the formula: I = P * r * t, 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 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 in an account with compound interest?

Back

To calculate the total amount in an account with compound interest, use the formula A = P(1 + r/n)^(nt).

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 you deposit $1,000 at an interest rate of 5% compounded annually, how much will you have after 3 years?

Back

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

Front

What is the difference between simple and compound interest?

Back

Simple interest is calculated only on the principal, while compound interest is calculated on the principal plus any interest that has already been added.

Front

What is the formula for calculating simple interest?

Back

The formula for calculating simple interest is I = P * r * t.

Front

If you invest $2,000 at a 3% interest rate compounded annually for 5 years, what is the total amount?

Back

A = 2000(1 + 0.03)^5 = $2318.55.

Front

What is the principal in the context of interest calculations?

Back

The principal is the initial amount of money that is deposited or invested before any interest is applied.

Front

How do you find the interest earned on an investment?

Back

To find the interest earned, subtract the principal from the total amount after interest is applied: Interest = Total Amount - Principal.