Understanding Simple and Compound Interest

The video tutorial explains the concept of simple interest, including its formula and purpose. It provides a detailed example of calculating simple interest on a $5,000 principal over 30 years. The tutorial then introduces compound interest, highlighting its benefits over simple interest. An example is given to demonstrate how compound interest accumulates over time, showing the increasing principal and interest amounts each year.

What is the primary purpose of calculating interest?

• To determine the total amount of money borrowed

• To calculate the extra money paid for using borrowed money

• To find out the duration of a loan

• To assess the risk of lending money

Which formula is used to calculate simple interest?

• I = P - R

• I = P/R

• I = P + R

• I = PRT

In the example provided, what was the principal amount used for calculating simple interest?

• $10,000

• $7,000

• $5,000

• $3,000

How much interest is added each year in the simple interest example?

• $400

• $500

• $300

• $200

Why is simple interest considered less beneficial compared to compound interest?

• It requires more calculations

• The interest amount decreases over time

• The interest amount remains constant over time

• It is only applicable for short-term loans

What is a key feature of compound interest?

• Interest remains constant throughout the term

• Interest is subtracted from the principal

• Interest is added to the principal periodically

• Interest is calculated only once at the end of the term

Why is compound interest often referred to as 'real interest'?

• It is used in real estate transactions

• It reflects the true growth of an investment

• It is only applicable to real money

• It is used in real-time calculations

In the compound interest example, what happens to the principal amount each year?

• It is divided by the interest rate

• It remains the same

• It increases

• It decreases

How does the interest amount change each year in the compound interest example?

• It increases

• It remains constant

• It decreases

• It is halved

What is the principal amount after three years in the compound interest example?

• $5,300

• $5,618

• $5,955

• $6,000