2.2 Flashcard Review

Front

What is the formula for compound interest?

Back

A = P(1 + r/n)^(nt), where A is the amount of money accumulated after n years, including interest. P is the principal amount (the initial amount of money), r is the annual interest rate (decimal), n is the number of times that interest is compounded per year, and t is the number of years the money is invested or borrowed.

Front

What does 'compounded monthly' mean?

Back

It means that the interest is calculated and added to the principal balance 12 times a year.

Front

How do you convert months to years for the compound interest formula?

Back

Divide the number of months by 12. For example, 6 months is 0.5 years.

Front

If an investment of $5,000 earns 2.25% compounded monthly, what is the interest earned after 18 months?

Back

$171.47, leading to a total balance of $5,171.47.

Front

What is the effect of compounding frequency on interest earned?

Back

The more frequently interest is compounded, the more interest will be earned over time.

Front

What is the principal amount in a loan?

Back

The principal amount is the original sum of money borrowed or invested, before interest.

Front

What does 'grace period' mean in the context of loans?

Back

A grace period is a time frame during which a borrower is not required to make payments, but interest may still accrue.

Front

How do you calculate the total amount owed on a loan after a grace period?

Back

Calculate the interest accrued during the grace period and add it to the principal amount.

Front

What is the annual interest rate in decimal form for 4.25%?

Back

0.0425.

Front

If Kira takes a $12,000 loan at 4.25% compounded daily, what is the total amount owed after 6 months?

Back

$12,257.71.