FST 7.1 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 monthly' mean?

Back

'Compounded monthly' means that interest is calculated and added to the principal balance 12 times a year.

Front

If Karla invests $1,000 at 6.75% compounded monthly for 15 years, what will her total amount be?

Back

$2,744.68

Front

What does 'quarterly' mean in terms of compounding frequency?

Back

Quarterly means that interest is compounded 4 times a year.

Front

What is the future value of a principal of $999 at an interest rate of 5.45% compounded quarterly for 19 years?

Back

$2,794.10

Front

What is the future value of a principal of $5,000 at an interest rate of 3.75% compounded monthly for 25 years?

Back

$12,749.30

Front

Define Principal in the context of compound interest.

Back

Principal is the initial sum of money invested or loaned, before interest.

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 compounding periods per year, and t is the number of years.

Front

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

Back

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