Simple and Compound Interest

Front

What is Simple Interest?

Back

Simple Interest is the interest calculated only on the principal amount, or the original amount of money deposited or borrowed.

Front

What is the formula for Simple Interest?

Back

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

How do you calculate the total amount after applying Simple Interest?

Back

A = P + I, where A is the total amount, P is the principal, and I is the interest.

Front

What is Compound Interest?

Back

Compound Interest is the interest calculated on the initial principal, which also includes all of the accumulated interest from previous periods.

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

Front

If you deposit $1000 at a 5% simple interest rate for 3 years, how much interest will you earn?

Back

I = Prt = 1000 * 0.05 * 3 = $150.

Front

What is the difference between Simple Interest 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

If you borrow $2000 at a 10% annual interest rate for 2 years, what will be the total amount to be paid back using Simple Interest?

Back

Total Amount = Principal + Interest = 2000 + (2000 * 0.10 * 2) = $2400.

Front

What is the effective interest rate?

Back

The effective interest rate is the actual interest rate an investor earns or pays in a year, taking into account the effect of compounding.

Front

How do you find the total amount after 5 years if $500 is invested at a 4% interest rate compounded annually?

Back

A = P(1 + r)^t = 500(1 + 0.04)^5 = $608.81.