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 calculated?

Back

Compound Interest = P(1 + r/n)^(nt), where P = principal amount, r = annual interest rate (decimal), n = number of times interest applied per time period, t = number of time periods.

Front

What does 'compounded annually' mean?

Back

It means that the interest is calculated once per year on the principal amount.

Front

What does 'compounded semi-annually' mean?

Back

It means that the interest is calculated twice a year on the principal amount.

Front

What does 'compounded quarterly' mean?

Back

It means that the interest is calculated four times a year on the principal amount.

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 accumulated interest.

Front

If $1,000 is invested at an interest rate of 5% compounded annually, how much will it be worth after 3 years?

Back

$1,157.63

Front

If $2,000 is invested at an interest rate of 4% compounded quarterly, how much will it be worth after 5 years?

Back

$2,208.40

Front

What is the formula for calculating the future value of an investment with compound interest?

Back

Future Value = P(1 + r/n)^(nt) where P = principal, r = annual interest rate, n = number of times interest applied per year, t = number of years.

Front

What is the effective annual rate (EAR)?

Back

The effective annual rate is the interest rate on an investment or loan that is compounded over a period of time, expressed as an annual rate.