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) - P, 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 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

What does 'compounded quarterly' mean?

Back

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

Front

If you invest $1,000 at an interest rate of 5% compounded annually, what will be the total amount after 3 years?

Back

Total Amount = $1,000(1 + 0.05)^3 = $1,157.63.

Front

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

Back

Future Value = P(1 + r/n)^(nt), where 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

What is the principal in a compound interest problem?

Back

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

Front

How does the frequency of compounding affect the total interest earned?

Back

The more frequently interest is compounded, the more interest will be earned, as interest is calculated on previously accumulated interest.

Front

What is the effective annual rate (EAR)?

Back

The effective annual rate is the interest rate on an investment or loan that is compounded over a year, reflecting the effects of compounding.

Front

If you have $2,000 in an account that earns 3% interest compounded monthly, how much will you have after 5 years?

Back

Total Amount = $2,000(1 + 0.03/12)^(12*5) = $2,348.85.