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, 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 convert a percentage to a decimal?

Back

To convert a percentage to a decimal, divide the percentage by 100. For example, 5% becomes 0.05.

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 $1000 at an interest rate of 5% compounded annually for 3 years, what is the total amount?

Back

A = 1000(1 + 0.05)^3 = $1157.63.

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 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

How much interest will $500 earn at 4% simple interest after 5 years?

Back

I = P * r * t = 500 * 0.04 * 5 = $100.

Front

What is the principal in the context of interest?

Back

The principal is the initial amount of money that is invested or loaned, before any interest is added.

Front

If you have $2000 invested at 3% interest compounded annually for 10 years, what is the total amount?

Back

A = 2000(1 + 0.03)^10 = $2687.48.