10/07 Compound Interest Practice

Front

What is the formula for calculating compound interest?

Back

A = P(1 + r/n)^(nt), where A is the amount of money accumulated after n years, including interest. P is the principal amount (the initial amount of money), 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

How do you convert a percentage to a decimal?

Back

To convert a percentage to a decimal, divide the percentage by 100. For example, 6.5% becomes 0.065.

Front

What does 'compounded annually' mean?

Back

Compounded annually means that the interest is calculated and added to the principal once per year.

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 and also on the accumulated interest from previous periods.

Front

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

Back

Use the formula A = P(1 + r/n)^(nt) to calculate the total amount, where you substitute the values for P, r, n, and t.

Front

What is continuous compounding?

Back

Continuous compounding is the process of earning interest on interest continuously, rather than at discrete intervals. The formula is A = Pe^(rt), where e is Euler's number (approximately 2.71828).

Front

If an investment earns 2.9% interest compounded quarterly, how often is the interest calculated?

Back

The interest is calculated four times a year, at the end of each quarter.

Front

What is the effective annual rate (EAR)?

Back

The effective annual rate (EAR) is the interest rate on an investment or loan that is compounded over a year, taking into account the effects of compounding.

Front

How do you find the future value of an investment compounded quarterly?

Back

Use the formula A = P(1 + r/n)^(nt), where n is 4 for quarterly compounding.

Front

What is the principal amount in a compound interest problem?

Back

The principal amount is the initial sum of money that is invested or loaned before interest.