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 calculated?

Back

Compound Interest = P(1 + r/n)^(nt), where P = principal amount, r = annual interest rate (decimal), n = number of times interest applied per time period, t = number of time periods.

Front

What does 'Principal' mean in finance?

Back

Principal is the initial sum of money borrowed or invested, before interest.

Front

What is the formula for calculating the future value with compound interest?

Back

Future Value = P(1 + r/n)^(nt) where 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

What does 'Compounded Annually' mean?

Back

Compounded annually means that the interest is calculated and added to the principal once a year.

Front

What does 'Compounded Monthly' mean?

Back

Compounded monthly means that the interest is calculated and added to the principal twelve times a year.

Front

What does 'Compounded Quarterly' mean?

Back

Compounded quarterly means that the interest is calculated and added to the principal four times a year.

Front

What is the effect of compounding frequency on interest earned?

Back

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

Front

If you invest $1,000 at an interest rate of 5% compounded annually for 3 years, what is the future value?

Back

Future Value = 1000(1 + 0.05/1)^(1*3) = $1,157.63.

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 accumulated interest.