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.

Front

How is compound interest different from simple interest?

Back

Compound interest is calculated on the total amount (principal + interest), while simple interest is calculated only on the principal.

Front

What formula is used to calculate compound interest?

Back

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, n is the number of times that interest is compounded per year, and t is the number of years.

Front

If you invest $1,000 at an annual interest rate of 5% compounded annually for 3 years, how much will you have?

Back

$1,157.63

Front

What does 'compounded annually' mean?

Back

It means that the interest is calculated and added to the principal once a year.

Front

What is the effect of a higher interest rate on compound interest?

Back

A higher interest rate increases the amount of interest earned over time.

Front

Why is it beneficial to leave money in a savings account for a longer period?

Back

Leaving money for a longer period allows more time for interest to accumulate, leading to a larger total amount due to compounding.

Front

What is the importance of time in compound interest calculations?

Back

The longer the time period, the more interest will be earned due to the effect of compounding.

Front

Convert 4.3% to a decimal.

Back

.043

Front

What is the relationship between time and interest in compound interest?

Back

Time directly affects the amount of interest earned; more time results in more interest.