Understanding Compound Interest

What is compound interest?

• Interest that decreases over time

• Interest calculated only on the initial principal

• Interest that is paid annually

• Interest on the interest already owed

Which of the following is NOT a variable in the compound interest formula?

• Number of compounding periods

• Interest rate

• Loan duration in months

• Principal amount

If the interest rate is 22%, what is its decimal equivalent?

• 0.022

• 2.2

• 22.0

• 0.22

How often is interest compounded if n equals 365?

• Annually

• Monthly

• Daily

• Quarterly

What is the first step in solving the compound interest formula?

• Divide the interest rate by the number of compounding periods

• Identify and substitute the variables

• Add the interest rate to one

• Multiply the principal by the interest rate

In the example, what is the exponent value calculated as?

• 0.22

• 91.25

• 365

• 1.0565

What is the final amount owed in the credit card example?

• $4,500

• $226

• $4,000

• $4,226

What is the purpose of reviewing the compound interest calculation process?

• To memorize the formula

• To learn about different types of interest

• To understand the impact of interest

• To practice solving different problems

If a payday loan has an APR of 261%, what does this mean?

• The loan is compounded annually

• The interest rate is 261% annually

• The loan must be paid back in 261 days

• The interest rate is 2.61%

What should you do if you cannot make a payment on time?

• Ignore the payment

• Contact the lender

• Increase the loan amount

• Wait for the interest to decrease