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

How is Compound Interest calculated?

Back

Compound Interest = P(1 + r/n)^(nt), where P = principal amount, r = annual interest rate (decimal), n = number of times interest applied per time period, t = number of time periods.

Front

What does 'compounded annually' mean?

Back

It means that the interest is calculated once per year on the principal amount.

Front

What does 'compounded monthly' mean?

Back

It means that the interest is calculated twelve times a year, with each month's interest added to the principal.

Front

What is the formula for Future Value (FV) in Compound Interest?

Back

FV = P(1 + r/n)^(nt), where FV is the future value of the investment/loan, 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 $1,000 is invested at an interest rate of 5% compounded annually for 3 years, what is the future value?

Back

FV = 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 accumulated interest.

Front

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

Back

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

Front

How do you determine the better loan option between two loans with different interest rates and compounding frequencies?

Back

Calculate the total amount paid for each loan over the same time period and compare the totals.

Front

What is the principal in a loan or investment?

Back

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