Calculating 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 quarterly' mean?

Back

It means that the interest is calculated and added to the principal four times a year.

Front

What does 'compounded semiannually' mean?

Back

It means that the interest is calculated and added to the principal two times a year.

Front

What is the formula for calculating the future value of an investment?

Back

Future Value = P(1 + r/n)^(nt) where P is the principal, r is the annual interest rate, n is the number of compounding periods per year, and t is the number of years.

Front

If you invest $1,000 at an interest rate of 5% compounded annually, how much will you have after 3 years?

Back

$1,157.63

Front

What is the principal in a compound interest problem?

Back

The principal is the initial amount of money that is invested or loaned.

Front

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

Back

Increasing the compounding frequency results in more interest being earned, as interest is calculated and added to the principal more frequently.

Front

If a loan of $10,000 has an interest rate of 6% compounded monthly, what is the total amount owed after 5 years?

Back

$13,488.16

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.