Calculating Compound Interest: Key Concepts and Examples

The video tutorial explains the compound interest formula, detailing each component: principal (P), interest rate (R), number of compounding periods per year (n), and time in years (T). It provides an example of investing $5,000 at an 8% interest rate compounded quarterly over two years, demonstrating how to calculate the final amount using the formula. The example shows the process of converting percentages to decimals, determining compounding periods, and using a calculator to find the final investment value.

What does 'P' represent in the compound interest formula?

• Total interest earned

• Initial investment amount

• Annual interest rate

• Number of compounding periods

How is the interest rate 'R' expressed in the formula?

• As a whole number

• As a fraction

• As a decimal

• As a percentage

What does 'n' signify in the context of compound interest?

• Initial amount invested

• Number of compounding periods per year

• Interest rate per period

• Total time in years

If the compounding is done quarterly, what would 'n' be?

• 365

• 52

• 12

• 4

In the provided example, what is the initial amount invested?

• $5,000

• $7,000

• $6,000

• $4,000

What is the new effective quarterly interest rate in the example?

• 20%

• 0.02%

• 0.2%

• 2%

How many times does the interest compound over the two-year period in the example?

• 2

• 4

• 8

• 16

What is the final amount after two years in the example?

• $6,500.00

• $6,200.00

• $6,000.00

• $5,858.30

How is the final amount calculated in the example?

• Multiplying the principal by the interest rate

• Adding the interest to the principal each period

• Dividing the annual interest by the number of periods

• Raising the base to the power of the number of periods

What does the final amount include in the calculation?

• Only the interest earned

• Both the initial investment and the interest earned

• Only the initial principal

• None of the above