What is the compound interest formula and what does it mean

The video tutorial introduces the concept of compound interest, explaining how it involves earning interest on both the initial investment and previously earned interest. It discusses the exponential growth of money through compound interest and provides a detailed explanation of the compound interest formula. The tutorial breaks down each component of the formula, including the final amount, initial amount, rate, compounding frequency, and time. Practical examples are given to illustrate how the formula is applied in real-world scenarios.

What is the primary difference between compound interest and simple interest?

• Compound interest includes interest on previously earned interest.

• Simple interest is calculated on the initial principal and previously earned interest.

• Compound interest is calculated only on the initial principal.

• Simple interest includes interest on previously earned interest.

In the context of compound interest, what does the term 'exponential growth' refer to?

• A rapid increase in investment value due to compounding.

• A constant investment value over time.

• A decrease in investment value over time.

• A linear increase in investment value over time.

Which of the following best describes the compound interest formula?

• A = P + r * t

• A = P * (1 + r/n)^(n*t)

• A = P * r * t

• A = P * (1 + r*t)

In the compound interest formula, what does 'P' represent?

• The initial principal

• The number of compounding periods

• The final amount

• The interest rate

What does 'n' signify in the compound interest formula?

• The number of years

• The initial principal

• The number of times interest is compounded per year

• The final amount

Why is it important to understand the compounding frequency in financial planning?

• It has no impact on the investment growth.

• It determines the initial investment amount.

• It affects the rate of return on investment.

• It influences how quickly the investment grows.

If an investment is compounded monthly, what would be the value of 'n' in the formula?

• 1

• 4

• 365

• 12