Calculating Compound Interest

Front

What is compound interest?

Back

Compound interest is the interest calculated on the initial principal and also on the accumulated interest of previous periods. It is calculated using the formula 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 the money is invested or borrowed.

Front

What is the formula for calculating compound interest?

Back

The formula for calculating compound interest is A = P(1 + r/n)^(nt), where A is the total amount after interest, P is the principal amount, r is the annual interest rate (decimal), n is the number of times 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 amount, which is the initial sum of money invested or borrowed.

Front

What does 'r' represent in the compound interest formula?

Back

'r' represents the annual interest rate expressed as a decimal.

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 number of years the money is invested or borrowed.

Front

If $1,500 is invested at an interest rate of 8.25% compounded semiannually, what will be the balance after 18 years?

Back

$6,427.94

Front

If Mark took a loan of $25,690 at an interest rate of 5.2% compounded monthly, how much will he have paid after 5 years?

Back

$33,299.42

Front

How does compounding frequency affect the total amount of compound interest earned?

Back

The more frequently interest is compounded, the more interest will be earned on the initial principal and accumulated interest, leading to a higher total amount.

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 and the accumulated interest from previous periods.