Calculating Simple vs. Compound Interest

What is interest often compared to when borrowing money?

• A tax on borrowing

• A fee for service

• A penalty for late payment

• Renting money

What does the principal amount refer to?

• The time period of the loan

• The total amount owed after interest

• The initial amount of money borrowed or lent

• The interest rate applied to the loan

What does the rate in interest calculations usually refer to?

• The percentage of the principal to be paid as interest

• The balance after interest is applied

• The total amount repayable

• The amount of time the money is borrowed for

What is the formula for calculating simple interest?

• Interest = Principal + Rate + Time

• Interest = Principal x Rate x Time

• Interest = Principal / (Rate x Time)

• Interest = (Principal x Rate) / Time

How do you calculate the balance after earning interest?

• Balance = Principal + Interest

• Balance = Principal x (1 + Rate x Time)

• Balance = Principal / (1 + Rate x Time)

• Balance = (Principal + Interest) / Time

After how many years would a $400 investment at 4% annual interest become $480?

• 10 years

• 8 years

• 5 years

• 3 years

What does the balance represent in financial transactions?

• The time period of the loan

• The interest rate

• The total amount in the account or owed at a future time

• The principal amount only

How is simple interest different from compound interest?

• Simple interest rates are always higher

• Compound interest is calculated on the principal and previous interest

• Simple interest is calculated on the principal only

• Compound interest is only used for savings accounts

What is the effect of compound interest on a loan over time?

• It increases the total amount owed due to interest on interest

• It only applies to the principal amount

• It decreases the total amount owed

• It keeps the total amount owed the same

Why is it important to understand the difference between simple and compound interest?

• To calculate total savings accurately

• To avoid paying interest

• To choose the right bank

• To understand how interest can accumulate over time