Simple and Compound Interest

Front

What is Simple Interest?

Back

Simple Interest is calculated using the formula: I = P * r * t, where I is the interest, P is the principal amount, r is the rate of interest per year, and t is the time in years.

Front

What is Compound Interest?

Back

Compound Interest is calculated on the initial principal and also on the accumulated interest from previous periods. The formula 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, n is the number of times that interest is compounded per year, and t is the number of years.

Front

How do you calculate Simple Interest?

Back

To calculate Simple Interest, use the formula: I = P * r * t. For example, if you deposit $5,000 at a 2.5% interest rate for 3 years, the interest earned would be I = 5000 * 0.025 * 3 = $375.

Front

How do you calculate Compound Interest?

Back

To calculate Compound Interest, use the formula: A = P (1 + r/n)^(nt). For example, if you invest $3,000 at a 3.25% interest rate compounded annually for 5 years, A = 3000 * (1 + 0.0325/1)^(1*5) = $3520.23.

Front

What is the difference between Simple and Compound Interest?

Back

The main difference is that 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

What is the formula for calculating the total amount with Compound Interest?

Back

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

Front

If you invest $6,000 at a 4.25% interest rate for 8 years, how much interest will you earn with Simple Interest?

Back

Using the formula I = P * r * t, I = 6000 * 0.0425 * 8 = $2040.

Front

If you invest $6,000 at a 4.25% interest rate compounded annually for 8 years, how much will you have?

Back

Using the compound interest formula, A = 6000 * (1 + 0.0425/1)^(1*8) = $8,370.66.

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 difference in interest earned between Simple and Compound Interest?

Back

Calculate both Simple Interest and Compound Interest for the same principal, rate, and time, then subtract the Simple Interest from the Compound Interest.