Simple and Compound Interest

Front

What is the formula for calculating simple interest?

Back

The formula for calculating simple interest is I = PRT, where I is the interest, P is the principal amount, R is the rate of interest (as a decimal), and T is the time in years.

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

How do you calculate the total amount in an account with compound interest?

Back

The total amount A in an account with compound interest can be calculated using the formula A = P(1 + r/n)^(nt), where P is the principal, r is the annual interest rate (as a decimal), n is the number of times interest is compounded per year, and t is the number of years.

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 to the account.

Front

If you invest $1,000 at a simple interest rate of 5% for 3 years, how much interest will you earn?

Back

You will earn $150 in interest. (I = PRT = 1000 * 0.05 * 3 = 150)

Front

What is the effective annual rate (EAR) in the context of compound interest?

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 effect of compounding.

Front

How do you convert a percentage interest rate to a decimal for calculations?

Back

To convert a percentage interest rate to a decimal, divide the percentage by 100. For example, 5% becomes 0.05.

Front

What is the principal amount in the context of interest calculations?

Back

The principal amount is the initial sum of money that is either invested or borrowed, before any interest is applied.

Front

How do you calculate the total amount after 15 years with an initial investment of $475 at an interest rate of 3.8% compounded annually?

Back

Using the formula A = P(1 + r/n)^(nt), the total amount after 15 years would be approximately $831.10.

Front

What is the total interest paid on a loan of $195,000 at a 4.3% interest rate compounded annually over 30 years?

Back

The total interest paid would be approximately $494,546.99.