Interest Review

Front

What is simple interest?

Back

Simple interest is calculated using the formula: I = PRT, where I is the interest, P is the principal amount, R is the rate of interest per year, and T is the time in years.

Front

How do you calculate the total amount to be paid back on a loan with simple interest?

Back

Total Amount = Principal + Interest, where Interest = PRT.

Front

What is compound interest?

Back

Compound interest is calculated on the initial principal and also on the accumulated interest from previous periods, using the formula: 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

What is the formula for continuously compounded interest?

Back

A = Pe^(rt), where A is the amount, P is the principal, e is the base of the natural logarithm, r is the annual interest rate, and t is the time in years.

Front

If $1200 is borrowed at 8% simple interest for 2 years, how much total will be paid back?

Back

Total Amount = $1200 + ($1200 * 0.08 * 2) = $1392.

Front

What is the ending balance of an investment of $1,000 at 16% interest compounded continuously for 5 years?

Back

Ending Balance = $1,000 * e^(0.16 * 5) = $2,225.54.

Front

How do you calculate the total amount in a savings account with simple interest?

Back

Total Amount = Principal + (Principal * Rate * Time).

Front

What is the effect of compounding frequency on the total amount in an investment?

Back

The more frequently interest is compounded, the greater the total amount will be due to interest being calculated on previously accumulated interest.

Front

If $3,250 is invested at 5.2% simple interest for 6 years, what will the total amount be?

Back

Total Amount = $3,250 + ($3,250 * 0.052 * 6) = $4,264.

Front

What is the formula for calculating the future value of an investment compounded semiannually?

Back

Future Value = P(1 + r/n)^(nt), where n = 2 for semiannual compounding.