Compound Interest Practice

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

The formula for compound interest is 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.

Front

What does 'compounded quarterly' mean?

Back

Compounded quarterly means that interest is calculated and added to the principal four times a year.

Front

What does 'compounded semi-annually' mean?

Back

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

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 Shawn chooses Option A, what is the total amount he will pay after 6 years?

Back

Using the formula A = P(1 + r/n)^(nt), for Option A: P = 12500, r = 0.085, n = 4, t = 6, A = 12500(1 + 0.085/4)^(4*6) = $19,195.21.

Front

If Riley invests $1,000 at 6.75% compounded semi-annually for 15 years, what is the total amount?

Back

Using the formula A = P(1 + r/n)^(nt), A = 1000(1 + 0.0675/2)^(2*15) = $2,706.86.

Front

What is the formula for calculating the total amount paid on a loan with compound interest?

Back

The formula is A = P(1 + r/n)^(nt), where A is the total amount paid, P is the principal, r is the interest rate, n is the number of compounding periods per year, and t is the number of years.

Front

How many times is interest compounded in a year if it is compounded monthly?

Back

12 times a year.

Front

What is the significance of the time variable in the formula I = Prt?

Back

The time variable must be in years for the formula to be accurate.