Compound Interest Pre-flashcard Practice

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 different from simple interest?

Back

Compound interest is calculated on the initial principal and also on the accumulated interest of previous periods, while simple interest is calculated only on the principal amount.

Front

What is the formula for calculating compound interest?

Back

The formula is A = P(1 + r/n)^(nt), where A is the amount of money accumulated after n years, including interest, P is the principal amount, 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.

Front

If $3400 is invested at an annual interest rate of 3.6% compounded annually for 2 years, what is the balance?

Back

$3,649.21

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

How do you convert a percentage to a decimal for calculations?

Back

To convert a percentage to a decimal, divide the percentage by 100. For example, 14% becomes 0.14.

Front

If you invest $40,000 at an annual interest rate of 14% compounded quarterly for 6 years, what is the future value?

Back

$91,333.14

Front

What is the effect of compounding frequency on the amount of compound interest earned?

Back

The more frequently interest is compounded, the more interest will be earned on the investment.

Front

Calculate the balance of a $13,500 deposit earning 3.3% compounded monthly after 1 year.

Back

$13,952.30

Front

What is the principal in a compound interest problem?

Back

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