Vocab
Calculating interest
Compounding Formula
Smart Savings
Find the Mistake
100
What does principal represent?
The starting amount of money before any interest is added.
100
You invested $52,400 at 6% compounded annually for 5 years. What is your total return on this investment?
70,123.02
100
What is the general form of a compound interest formula for annual compounding?
100
Two accounts compound interest at the same frequency but have different interest rates. Which is better long term?
The account with the higher interest rate.
100
A student says compound interest adds the same amount every year.
Compound interest adds a different amount each year because the balance changes.
200
What is interest?
The percent change in a balance over a set time.
200
You borrowed $10,400 for 4 years at 12.7% and the interest is compounded semiannually. What is the total you will pay back?
17,018.97
200
Which part of the compound interest formula represents the starting amount?
P (Principal)
200
Two accounts have the same starting amount and interest rate. One compounds more frequently. Which grows more?
The account that compounds more frequently.
200
A student uses the interest rate instead of the growth factor in the formula.
Add 1 to the interest rate to get the growth factor.
300
What does it mean when interest is compounded?
Interest is earned on both the original amount and the interest already added.
300
Your 2 year investment of $5,300 earns 2.9% and is compounded annually. What will your total return be?
5,611.86
300
Write the compound interest formula when interest is compounded multiple times per year.
300
Two accounts start with the same amount. One earns simple interest of 7% and one earns compound interest of 6%. Which grows faster?
The one that earns compound interest.
300
A student says a negative time value means the money is negative.
It represents a time before the starting point.
400
What is APR?
The annual interest rate without considering compounding.
400
You invested $100 at 8.2% which is compounded annually for 7 years. How much will your $100. be worth in 7 years?
173.62
400
What does the variable n or m represent in a compound interest formula?
The number of times interest is compounded each year.
400
Why does compound interest become more powerful over longer time periods?
Because interest is repeatedly earned on an increasing balance.
400
Tim is calculating how much he owes Marcus on a loan that is compounded quarterly at 8% for 3 years. He uses a factor of 1.02 and an exponent of 3.
The exponent should be the total number of quarters: 4×3=12
500
Explain the difference between simple interest and compound interest.
Simple interest is earned only on the starting amount, while compound interest is earned on the starting amount and previously earned interest.
500
Your investment of $18,100 at 13.6% compounded quarterly for 7.5 years will be worth how much?
49,350.86
500
Why does the exponent include both time and compounding frequency?
Because interest is applied once for every compounding period over the total time.
500
Why is compound interest often called “interest on interest”?
Because new interest is calculated on both the original money and previously earned interest.
500
A student forgets to divide the APR by n. Why will their answer be too big?
Because they will calculate interest as if the annual rate is used for each compound.