3.5-3.6 PCH Annuities and Compound interest

Front

What is an annuity?

Back

An annuity is a series of equal payments made at regular intervals over time, often used for retirement savings.

Front

Define 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 is the formula for calculating the future value of an investment compounded annually?

Back

Future Value = P(1 + r)^n, where P is the principal, r is the annual interest rate, and n is the number of years.

Front

How is the annual percentage yield (APY) calculated?

Back

APY = (1 + r/n)^(n*t) - 1, where r is the nominal interest rate, n is the number of compounding periods per year, and t is the number of years.

Front

What does it mean for interest to be compounded daily?

Back

Compounding daily means that interest is calculated and added to the principal balance every day.

Front

If $1,000 is invested at 5% interest compounded annually, what will the investment be worth after 3 years?

Back

Future Value = 1000(1 + 0.05)^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 formula for the future value of an annuity?

Back

Future Value = P * [(1 + r)^nt - 1] / r, where P is the payment amount, r is the interest rate per period, and nt is the total number of payments.

Front

What is continuous compounding?

Back

Continuous compounding is the process of earning interest on interest continuously, calculated using the formula A = Pe^(rt), where e is Euler's number.

Front

How do you calculate the total amount earned from an investment after a certain period?

Back

Total Amount = Principal + Interest Earned.