Introduction to Compound Interest

Compound Interest Study Quide

Compound Interest

Interest that is compounded multiple times throughout the year

Vocab

Interest Period - the amount of time that passes before interest is calculated

Future Value/Maturity Value - the sum of the compound interest and the original principal

Period Interest Rate (R) - the interest rate applied to each period, use the period interest rate in our calculations

Multiple Choice

If you have an investment that compounds interest monthly with an annual interest rate of 4%. What will the period interest rate(R) be?

• .4/12

• .04/52

• .04/12

Periods of Compound Interest (N)

Annually - every 12 months

Semi Annually - every 6 months

Monthly - every month

Semi Monthly - twice a month

Daily - every day

Multiple Choice

If you compound interest monthly for 5 years, how many periods of interest (N) would you have?

• 5

• 12

• 60

Multiple Choice

If you compound interest quarterly for 7 years, how many periods of interest (N) do you have?

• 28

• 7

• 21

• 82

Future Value

The amount of your investment after a certain amount of time

FV = Future Value

P = Original Principal

R = Period Interest Rate

N = # of periods

Multiple Choice

An investment of $7,000 is compounded daily for 6 years. The interest rate is 4% annual. What value will you enter for R in the given equation?

• .004/365

• .4/365

• .04/365

• .04/6

Multiple Choice

An investment of $7,000 is compounded monthly for 6 years. The interest rate is 4% annual. What value will you enter for N in the given equation?

• 12

• 6

• 24

• 72

Calculating Compound Interest

I = Amount of Compound Interest

P = Original Principal

R = Period Interest Rate

N = # of periods

Multiple Choice

An investment of $17,000 that is compounded quarterly for 15 years with an interest rate of 3.85% annual. What value will you enter in for R in given equation.

• .0385

• .0385/4

• .385/4

• .0385/15

Multiple Choice

An investment of $17,000 that is compounded quarterly for 15 years with an interest rate of 3.85% annual. What value will you enter in for N in given equation.

• 4

• 60

• 30

• 15