Compound Interest

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. It allows your investment to grow at a faster rate than simple interest, which is calculated only on the principal.

Front

How do you convert a percentage to a decimal?

Back

To convert a percentage to a decimal, divide the percentage by 100. For example, 6.5% becomes 0.065.

Front

What is the formula for calculating compound interest?

Back

The formula for calculating compound interest is A = P(1 + r/n)^(nt), where A is the amount of money accumulated after n years, including interest, P is the principal amount, r is the annual interest rate (decimal), n is the number of times that interest is compounded per year, and t is the number of years.

Front

If you deposit $1,000 at an interest rate of 5% compounded annually, what will be the balance after 10 years?

Back

Using the formula A = P(1 + r)^t, A = 1000(1 + 0.05)^10 = $1,628.89.

Front

What does it mean for interest to be compounded annually?

Back

Compounded annually means that the interest is calculated and added to the principal once per year.

Front

How do you find the total amount after borrowing money with compound interest?

Back

To find the total amount after borrowing, use the compound interest formula A = P(1 + r/n)^(nt), where P is the borrowed amount, r is the interest rate, n is the number of compounding periods per year, and t is the number of years.

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 an interest rate of 4%, how would you express this as a decimal?

Back

4% as a decimal is 0.04.

Front

What is the balance of an account after 5 years if $2,000 is deposited at an interest rate of 6% compounded annually?

Back

Using the formula A = P(1 + r)^t, A = 2000(1 + 0.06)^5 = $2,686.65.

Front

How do you calculate the interest earned on an investment?

Back

The interest earned can be calculated by subtracting the principal from the total amount after interest is applied: Interest = A - P.