Simple and compound interest

Front

What is simple interest?

Back

Simple interest is a method of calculating the interest charge on a loan or financial product based on the original principal amount and the interest rate over a specified period of time.

Front

How do you calculate simple interest?

Back

Simple Interest (SI) = Principal (P) × Rate (R) × Time (T), where Rate is in decimal form and Time is in years.

Front

What is the formula for calculating the total amount to be paid back with simple interest?

Back

Total Amount = Principal + Simple Interest.

Front

If you have a principal of $1,000, an interest rate of 5%, and a time period of 3 years, what is the simple interest?

Back

Simple Interest = $1,000 × 0.05 × 3 = $150.

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

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 does 'compounded annually' mean?

Back

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

Front

If you invest $2,000 at an annual interest rate of 4% compounded annually for 3 years, what is the total amount?

Back

Total Amount = $2,000 × (1 + 0.04)^3 = $2,000 × 1.124864 = $2,249.73.

Front

What is the difference between nominal and effective interest rates?

Back

Nominal interest rate is the stated interest rate, while effective interest rate takes into account the effects of compounding during the year.

Front

How do you convert months into years for interest calculations?

Back

To convert months into years, divide the number of months by 12.