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 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

What does 'compounded annually' mean?

Back

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

Front

What does 'compounded semiannually' mean?

Back

Compounded semiannually means that the interest is calculated and added to the principal twice a year.

Front

What does 'compounded quarterly' mean?

Back

Compounded quarterly means that the interest is calculated and added to the principal four times a year.

Front

If you invest $1,000 at an interest rate of 5% compounded annually, how much will you have after 3 years?

Back

After 3 years, you will have $1,157.63.

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 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 does increasing the compounding frequency affect the total amount of interest earned?

Back

Increasing the compounding frequency results in more interest being earned, as interest is calculated on a smaller time interval.

Front

What is the principal in a compound interest scenario?

Back

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