Interest Flashcard Review

Front

What is the Rule of 72?

Back

The Rule of 72 is a formula used to estimate the number of years required to double the investment at a fixed annual rate of return. It states that you can divide 72 by the annual interest rate to get the approximate number of years to double your money.

Front

How do you calculate compound interest?

Back

Compound interest can be calculated using the formula: 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 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 and also on the accumulated interest from previous periods.

Front

If you invest $1,000 at an interest rate of 5% compounded annually, how much will you have after 3 years?

Back

After 3 years, you will have $1,157.63.

Front

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

Back

The future value (FV) of an investment can be calculated using the formula: FV = P(1 + r)^t, where P is the principal, r is the interest rate, and t is the time in years.

Front

What does it mean for interest to be compounded semiannually?

Back

Compounding semiannually means that the interest is calculated and added to the principal twice a year.

Front

How long will it take for an investment to double at an interest rate of 6% compounded annually?

Back

It will take approximately 12 years for the investment to double at an interest rate of 6% compounded annually.

Front

What is the total amount to be repaid on a loan of $21,000 at 7.5% interest compounded annually for 5.5 years?

Back

The total amount to be repaid is $31,258.34.

Front

If you deposit $1,500 in a bank account with a 7% annual interest rate, what will be the total amount after 3 years?

Back

The total amount after 3 years will be $1,837.56.

Front

What is the effect of increasing the interest rate on the time it takes for an investment to double?

Back

Increasing the interest rate decreases the time it takes for an investment to double.