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 is the formula for calculating 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

If an account earns 4% interest compounded quarterly, how many times is interest paid in a year?

Back

Interest is paid 4 times a year.

Front

What does 'Semi-Annually' mean in terms of compounding?

Back

Semi-Annually means that interest is compounded 2 times a year.

Front

How do you calculate the total amount in an account after a certain number of years with compound interest?

Back

Use the formula A = P(1 + r/n)^(nt) to calculate the total amount.

Front

What is the effect of compounding frequency on the total amount of interest earned?

Back

The more frequently interest is compounded, the more interest will be earned over time.

Front

What is the difference in total amounts for accounts compounded monthly vs. quarterly at the same interest rate?

Back

The difference is usually very small, often less than $1, especially at lower interest rates.

Front

How long will it take for an investment to double with simple interest at a rate of 4%?

Back

It will take 25 years to double the investment.

Front

What is the principal amount in a compound interest problem?

Back

The principal amount is the initial sum of money deposited or invested before interest.