Simple Interest Concepts

The compound interest formula accounts for the principal, rate, and time.

• The exponent in the compound interest formula represents the number of compounding periods.

• The principal amount is the total amount after interest is applied.

• The rate is always fixed and does not change over time.

• The time period is irrelevant in calculating compound interest.

Show All Steps

• Examiners prefer clear working, so show all calculation steps.

• It's acceptable to skip steps if you understand the material.

• Only show steps if you have time during the exam.

• You can use shorthand for calculations.

In the formula for time (T), I represents interest, P represents principal, and R represents rate. What is the value of interest (I)?

• 5,000

• 6,750

• 7,500

• 8,000

Monthly Compounding

• When compounding monthly, n = 12.

• When compounding monthly, n = 6.

• When compounding monthly, n = 10.

• When compounding monthly, n = 4.

If the principal amount is increased in the simple interest formula, the total interest earned or paid increases.

• Higher principal amounts lead to more interest.

• The interest remains the same regardless of the principal amount.

• Lower principal amounts yield higher interest rates.

• Interest is only affected by the time period, not the principal.

The time variable represents time in years in the simple interest formula.

• Time is measured in months.

• Time is measured in days.

• Time is measured in years.

• Time is measured in weeks.

The missing rate (R) is determined to be 7%.

• T = @@\frac{I}{P \times R}@@

• T = @@I \times P \times R@@

• T = @@\frac{P}{I \times R}@@

• T = @@\frac{R}{I \times P}@@

Calculating the rate (R) involves understanding the relationship between interest, principal, and time.

• The time (T) in interest calculations is often expressed in years.

• The principal (P) is the total amount of money borrowed or invested.

• The interest (I) is calculated as a percentage of the principal only.

• The rate (R) is always expressed as a decimal.

Rearrange the formula to find Rate (R).

• @@rac{I}{P imes T}@@

• @@rac{P imes T}{I}@@

• @@I imes P imes T@@

• @@rac{T}{I imes P}@@

Calculating Compound Interest involves a loan of $5,000 with 4% annual interest, compounded monthly over 5 years.

• @@A = 5000(1 + 0.04/12)^{12 imes 5}@@

• @@A = 5000(1 + 0.04)^{5}@@

• @@A = 5000(1 + 0.04/2)^{2 imes 5}@@

• @@A = 5000(1 + 0.04/4)^{4 imes 5}@@