HOLUB- Level one: Simple and Compound Interests

Front

What is simple interest?

Back

Simple interest is calculated on the principal amount only, and it does not change over time. The formula is: Simple Interest = Principal × Rate × Time.

Front

What is compound interest?

Back

Compound interest is calculated on the initial principal and also on the accumulated interest from previous periods. The formula is: A = P(1 + r/n)^(nt), where A is the amount, P is the principal, r is the annual interest rate, n is the number of times interest is compounded per year, and t is the number of years.

Front

How do you calculate the total amount with simple interest?

Back

Total Amount = Principal + Simple Interest.

Front

How do you calculate the total amount with compound interest?

Back

Total Amount = Principal × (1 + Rate/Number of Compounding Periods)^(Number of Compounding Periods × Time).

Front

What is the formula for calculating simple interest?

Back

Simple Interest = Principal × Rate × Time.

Front

What is the formula for calculating compound interest?

Back

Compound Interest = Principal × (1 + Rate/Number of Compounding Periods)^(Number of Compounding Periods × Time) - Principal.

Front

If you invest $1,000 at 5% simple interest for 3 years, what is the interest earned?

Back

Interest = $1,000 × 0.05 × 3 = $150.

Front

If you invest $1,000 at 5% compounded annually for 3 years, what is the total amount?

Back

Total Amount = $1,000 × (1 + 0.05)^3 = $1,157.63.

Front

What is the difference between simple and compound interest?

Back

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

Front

What is the effect of compounding frequency on compound interest?

Back

The more frequently interest is compounded, the more total interest will be earned. For example, interest compounded monthly will yield more than interest compounded annually.