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 'n' represent in the compound interest formula?

Back

The number of times interest is compounded per year.

Front

If interest is compounded quarterly, how many times is it compounded in a year?

Back

4 times.

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 is the formula for calculating the total amount after compound interest?

Back

Total Amount = P(1 + r/n)^(nt).

Front

What does 't' represent in the compound interest formula?

Back

The time the money is invested or borrowed for, in years.

Front

If an investment of $1,000 is made at an interest rate of 5% compounded annually for 3 years, what is the total amount?

Back

Total Amount = 1000(1 + 0.05/1)^(1*3) = $1157.63.

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 year, reflecting the effects of compounding.

Front

How does the frequency of compounding affect the total amount?

Back

The more frequently interest is compounded, the more total interest will be earned or paid.