Compound Interest

Front

What does 'Semi-Annually' mean?

Back

It means occurring twice a year.

Front

What is Compound Interest?

Back

Interest calculated on the initial principal and also on the accumulated interest from previous periods.

Front

How do you calculate the future value with compound interest?

Back

Future Value = Principal × (1 + r/n)^(nt), where 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 want to double your investment in 15 years, what is the rule of thumb to estimate the interest rate?

Back

Use the Rule of 72: Divide 72 by the number of years to double (72/15 = 4.8%).

Front

What is the formula for calculating the amount of interest earned on an investment?

Back

Interest Earned = Future Value - Principal.

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 plus any interest earned.

Front

If you invest $1,000 at an interest rate of 5% compounded annually, what will be the amount after 3 years?

Back

Amount = $1,000 × (1 + 0.05)^3 = $1,157.63.

Front

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

Back

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

Front

What is the term for the initial amount of money invested or loaned?

Back

Principal.

Front

How much will $500 grow to at an interest rate of 3% compounded annually after 6 years?

Back

Amount = $500 × (1 + 0.03)^6 = $593.43.