6.7 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 does the formula A = P(1 + r/n)^(nt) represent?

Back

This formula calculates the future value (A) of an investment or loan based on the principal (P), annual interest rate (r), number of times interest is compounded per year (n), and the number of years the money is invested or borrowed (t).

Front

What does 'P' stand for in the compound interest formula?

Back

In the formula A = P(1 + r/n)^(nt), 'P' stands for the initial principal amount.

Front

What does 'r' represent in the compound interest formula?

Back

In the formula A = P(1 + r/n)^(nt), 'r' represents the annual interest rate (in decimal form).

Front

What does 'n' represent in the compound interest formula?

Back

In the formula A = P(1 + r/n)^(nt), 'n' represents the number of times that interest is compounded per year.

Front

What does 't' represent in the compound interest formula?

Back

In the formula A = P(1 + r/n)^(nt), 't' represents the number of years the money is invested or borrowed.

Front

How do you calculate the future value of an investment compounded annually?

Back

Use the formula A = P(1 + r)^t, where A is the future value, P is the principal, r is the annual interest rate, 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 future value?

Back

Using the formula A = 1000(1 + 0.05)^3, the future value is approximately $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 formula for calculating the total amount paid on a loan with compound interest?

Back

The total amount paid can be calculated using A = P(1 + r/n)^(nt), where A is the total amount, P is the principal, r is the interest rate, n is the number of compounding periods, and t is the time in years.