Simple and Compound Interest Test

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, which also includes all of 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 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 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 $1,000 at an interest rate of 5% compounded annually for 3 years, what is the total amount?

Back

A = 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 interest that has already been added.

Front

How do you calculate the interest earned on a loan?

Back

Interest earned can be calculated using the formula: I = P * r * t for Simple Interest, or using the Compound Interest formula for loans that compound.

Front

What is the principal in the context of interest calculations?

Back

The principal is the initial amount of money that is either invested or borrowed before interest.

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 borrow $500 for 2 years at an interest rate of 6%, what is the total interest paid?

Back

I = P * r * t = 500 * 0.06 * 2 = $60.

Front

What is the total amount to be paid back on a loan of $1,000 at 4% interest compounded annually for 5 years?

Back

A = 1000(1 + 0.04/1)^(1*5) = $1,217.65.