Simple and Compound Interest

Question 1

What is the concept of simple interest?

Answer 1

The interest (I) you pay depends on the Principal amount (P), annual rate of interest (R), and loan period in years (t)

Question 2

What is the formula for simple interest?

Answer 2

I = P * R * t

Question 3

What is the formula for the total value of a simple interest loan at the end of the loan period (A)?

Answer 3

A = P + I = P + P * R * t = P(1 + R * t)

Question 4

What occurs in compound interest?

Answer 4

interest is added or compounded to the principal at predetermined intervals; basically, you’re paying interest on interest

Question 5

How many times is compounding done per year, if it is not specified?

Answer 5

once per year

Question 6

In compound interest, what is the total value of the loan in t years if compounding is done once per year?

Answer 6

Aₜ = P(1 + R)ᵗ

Question 7

In compound interest, what is the total value of the loan in t years if compounding is done n times per year?

Answer 7

Aₜ = P(1 + R/n)ⁿᵗ - P

Question 8

In compound interest, what is the value, compound interest only (without principal), in t years if compounding is done n times per year?

Answer 8

Aₜ - P = P(1 + R/n)ⁿᵗ - P