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

How is Compound Interest different from 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

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

Front

What does 'compounded semi-annually' mean?

Back

It means that the interest is calculated and added to the principal twice a year.

Front

What is the formula for 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 (decimal), n is the number of times that interest is compounded per year, and t is the number of years.

Front

What does 'P' represent in the Compound Interest formula?

Back

'P' represents the principal or initial value.

Front

What does 'r' represent in the Compound Interest formula?

Back

'r' represents the annual interest rate (in decimal form).

Front

What does 'n' represent in the Compound Interest formula?

Back

'n' represents the number of times interest is compounded per year.

Front

What does 't' represent in the Compound Interest formula?

Back

't' represents the time the money is invested or borrowed for, in years.

Front

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

Back

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