Understanding Simple and Compound interest

Front

What is the formula for calculating Simple Interest?

Back

Simple Interest (SI) = Principal (P) × Rate (R) × Time (T) where Rate is in decimal and Time is in years.

Front

How do you convert a percentage to a decimal?

Back

To convert a percentage to a decimal, divide the percentage by 100.

Front

What is Compound Interest?

Back

Compound Interest is the interest calculated on the initial principal and also on the accumulated interest from previous periods.

Front

What is the formula for calculating Compound Interest?

Back

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

Front

If the Principal is $1,000, the Interest Rate is 5%, and the Time is 2 years, what is the Simple Interest?

Back

Simple Interest = $1,000 × 0.05 × 2 = $100.

Front

What does 'Principal' mean in finance?

Back

Principal is the initial amount of money that is either invested or loaned.

Front

In the formula A = P(1 + r)^t, what does 't' represent?

Back

In this formula, 't' represents the number of years the money is invested or borrowed.

Front

How do you find the time in years if given time in months?

Back

To convert months to years, divide the number of months by 12.

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

If you have a Principal of $2,000, an Interest Rate of 4%, and a Time of 3 years, what is the Compound Interest?

Back

Compound Interest = 2000(1 + 0.04)^3 - 2000 = $248.32.