simple and compound interest

Front

What is simple interest?

Back

Simple interest is calculated using the formula: I = P * r * t, 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

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 convert a percentage to a decimal?

Back

To convert a percentage to a decimal, divide the percentage by 100. For example, 5% becomes 0.05.

Front

What is the formula to calculate the total amount with compound interest?

Back

The formula is A = P (1 + r/n)^(nt), where A is the total 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

If you invest $1000 at an interest rate of 5% for 3 years, what is the simple interest earned?

Back

Using the formula I = P * r * t, the simple interest earned is I = 1000 * 0.05 * 3 = $150.

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

How much will $2000 grow in 5 years at an annual compound interest rate of 6%?

Back

Using the formula A = P (1 + r/n)^(nt), the total amount is A = 2000 (1 + 0.06/1)^(1*5) = $2676.28.

Front

What is the principal in the context of interest calculations?

Back

The principal is the initial amount of money that is invested or loaned, before any interest is added.

Front

How do you calculate the total amount after 2 years for an investment of $1500 at 4% compounded annually?

Back

Using the formula A = P (1 + r/n)^(nt), the total amount is A = 1500 (1 + 0.04/1)^(1*2) = $1624.80.

Front

What is the effective annual rate (EAR)?

Back

The effective annual rate (EAR) is the interest rate on an investment or loan that is compounded over a year, taking into account the effects of compounding.