Compound Interest Flashcard

Front

What is compound interest?

Back

Compound interest is the interest on a loan or deposit calculated based on both the initial principal and the accumulated interest from previous periods.

Front

What is the formula for calculating compound interest?

Back

The formula for compound interest is A = P(1 + r/n)^(nt), where A is the amount of money accumulated after n years, including interest, P is the principal amount, r is the annual interest rate (decimal), n is the number of times that interest is compounded per year, and t is the number of years the money is invested or borrowed.

Front

In the formula A = P(1 + r/n)^(nt), what does 'P' represent?

Back

'P' represents the principal amount, which is the initial sum of money invested or borrowed.

Front

In the formula A = P(1 + r/n)^(nt), what does 'r' represent?

Back

'r' represents the annual interest rate expressed as a decimal.

Front

In the formula A = P(1 + r/n)^(nt), what does 'n' represent?

Back

'n' represents the number of times that interest is compounded per year.

Front

In the formula A = P(1 + r/n)^(nt), what does 't' represent?

Back

't' represents the number of years the money is invested or borrowed.

Front

How do you calculate the total amount in an account after a certain number of years with compound interest?

Back

You use the formula A = P(1 + r/n)^(nt) to calculate the total amount.

Front

How do you find the amount of interest earned from compound interest?

Back

To find the interest earned, subtract the principal amount (P) from the total amount (A): Interest = A - P.

Front

What is the difference between simple interest and compound interest?

Back

Simple interest is calculated only on the principal amount, while compound interest is calculated on the principal plus any interest that has already been added.

Front

If an account is compounded annually, how does that affect the calculation of interest?

Back

If an account is compounded annually, the interest is calculated once per year, which simplifies the formula to A = P(1 + r)^t.