Formula Fundamentals
The initial or starting amount of money invested.
What is the Principal (or P)?
The number of times per year interest is compounded if the term is described as quarterly.
What is four?
The type of interest that is only calculated on the original principal amount.
What is Simple Interest?
This is how you write the annual interest rate (r) when substituting it into the formula when the rate is given as a percentage.
What is a decimal?
If an investment quadruples in value, this is the amount it has multiplied by.
What is 4?
The final value of an investment after all interest has been calculated and added.
What is the Future Value (or A)?
The value of n (total periods) for a 3-year investment that is compounded monthly.
What is 36?
The type of interest where interest is calculated on both the principal and the previously earned interest.
What is Compound Interest?
If the Future Value (A) is $15,000 and the Principal (P) is $10,000, this is the Compound Interest (CI) earned.
What is $5,000?
The number of quarters in 5 years.
What is 20?
This variable represents the total number of compounding periods over the entire investment term.
What is n?
The term used when interest is compounded twice per year, as in the case of Six-monthly compounding.
What is Semi-annually?
Given a long time frame, this investment type will typically yield a greater total return.
What is Compound Interest?
An investment term that is 27 quarters long must equal this many years and months.
What is 6 years and 9 months?
If a quarterly compounded investment runs for 5 years, the power to which the bracket is raised in the formula, n, must equal this.
What is 20?
This is the specific formula used in the document to calculate the future value (A) of an investment.
What is A=P(1+r)n?
For an investment period of 5 years compounded daily, this number is used to adjust the rate (r) and multiply the time to find n.
What is 365?
In the simple interest formula, the total interest earned is constant, whereas in the compound interest formula, the interest earned per period does this.
What is increases (or grows)?
The calculation required to find the interest earned during only the fourth year of an annually compounded investment.
What is Ayear 4 − Ayear 3?
If A=P(1+0.1/12)60, this is the number of years the investment ran for.
What is 5 years.
The value obtained when you subtract the Principal (P) from the Future Value (A).
What is the Compound Interest (CI) earned?
When comparing two investments with the same rate and term, this compounding frequency is generally most favourable to the investor.
What is daily?
The key factor that allows a 7.1% p.a. compounded daily investment to potentially outperform a 7.5% p.a. simple interest investment over many years.
What is the reinvestment of the interest (or earning interest on interest)?
The number of months it takes $8000 to grow to $14000 when invested at 6.5% p.a.
What is 104 months?
The interest earned (to the nearest dollar) in the 5th year of an investment of $12 000 compounding quarterly at 6.8% p.a.
What is $1096?