Simple vs. Compound Interest

Front

What is Simple Interest?

Back

Simple Interest is the interest calculated only on the principal amount, or the original amount of money borrowed or invested.

Front

What is Compound Interest?

Back

Compound Interest is the interest calculated on the initial principal, which also includes all the accumulated interest from previous periods.

Front

What does the 'P' in the formula I = Prt represent?

Back

The 'P' represents the principal, which is the amount of money borrowed or deposited.

Front

What does the 'r' in the formula I = Prt represent?

Back

The 'r' represents the rate of interest, expressed as a decimal.

Front

How do you convert a percentage to a decimal?

Back

To convert a percentage to a decimal, divide the percentage by 100.

Front

What is the formula for calculating Simple Interest?

Back

The formula for calculating Simple Interest is I = Prt.

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.

Front

If you invest $1000 at a 5% simple interest rate for 3 years, how much interest will you earn?

Back

You will earn $150 in interest (I = Prt = 1000 * 0.05 * 3).

Front

If you invest $1000 at a 5% compound interest rate compounded annually for 3 years, how much will you have?

Back

You will have $1157.63 (A = 1000(1 + 0.05)^3).

Front

What is the difference between Simple Interest and Compound Interest?

Back

Simple Interest is calculated only on the principal, while Compound Interest is calculated on the principal plus any interest that has already been added.