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 annual interest rate (in decimal), 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 calculate simple interest?

Back

To calculate simple interest, use the formula: I = P * r * t. For example, if you borrow $1,000 at a 5% interest rate for 3 years, the interest would be I = 1000 * 0.05 * 3 = $150.

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 $1,000 at a 5% interest rate compounded annually for 3 years, A = 1000(1 + 0.05/1)^(1*3) = $1157.63.

Front

What is the principal in a loan?

Back

The principal is the original sum of money borrowed or invested, excluding any interest or fees.

Front

What is the difference between simple 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.

Front

If you borrow $1,500 at 12% annual compound interest for 2 years, what is the total amount owed?

Back

Using the formula A = P (1 + r/n)^(nt), A = 1500(1 + 0.12/1)^(1*2) = $1,500(1.2544) = $1,881.60.

Front

What is the simple interest for a loan of $2,500 at 6.25% for 18 months?

Back

Using the formula I = P * r * t, I = 2500 * 0.0625 * 1.5 = $234.38.

Front

What is the total interest paid on a loan of $10,000 at 6% simple interest over 4 years?

Back

Using the formula I = P * r * t, I = 10000 * 0.06 * 4 = $2,400.

Front

What does 'annual interest rate' mean?

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The annual interest rate is the percentage of the principal that is charged as interest for one year.