Compound Interest

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 is compound interest different from simple interest?

Back

Compound interest is calculated on the initial principal and also on the accumulated interest of previous periods, while simple interest is calculated only on the principal amount.

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

What does 'compounded annually' mean?

Back

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

Front

If you invest $1,000 at an interest rate of 5% compounded annually for 3 years, what will be the total amount?

Back

Using the formula A = P(1 + r/n)^(nt), A = 1000(1 + 0.05/1)^(1*3) = $1,157.63.

Front

What is the effect of increasing the compounding frequency on the total amount?

Back

Increasing the compounding frequency (e.g., from annually to semi-annually or quarterly) generally results in a higher total amount due to interest being calculated and added to the principal more frequently.

Front

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

Back

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

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 borrowed before interest is applied.

Front

What is the total amount after 2 years if $59,000 is borrowed at 11% compounded annually?

Back

The total amount to be paid back after 2 years is $72,693.90.

Front

How much will an investment of $40,000 at 14% compounded annually be worth after 6 years?

Back

The investment will be worth $87,798.90 after 6 years.