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

What is the formula for Compound Interest?

Back

A = P(1 + r/n)^(nt), where A is the amount of money accumulated after n years, including interest, P is the principal amount, 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

What does 'compounded daily' mean in terms of n?

Back

If interest is compounded daily, n equals 365.

Front

How many times a year is interest compounded if it is semi-annually?

Back

If interest is compounded semi-annually, it is compounded 2 times a year.

Front

What is the future value of an investment of $1,000 at 16% interest compounded continuously for 5 years?

Back

The future value is $2,225.54.

Front

What is the future account balance for a principal of $5,000 at an interest rate of 3.75% compounded monthly for 25 years?

Back

The future account balance is $12,749.30.

Front

What is the equation to calculate the future value of an investment of $1,200 compounded continuously at 9% for 10 years?

Back

The equation is A = 1200e^(0.09*10).

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 quarterly' mean in terms of n?

Back

If interest is compounded quarterly, n equals 4.

Front

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

Back

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