Simple And Compound Interest

• What is the definition of simple interest?

  Simple interest is calculated only on the principal amount.
• How is compound interest defined?

  Compound interest is calculated on the principal and the accumulated interest from previous periods.
• How much simple interest is earned on £100 at 10% for 2 years?

  £20
• What is the compound interest on £100 at 10% for 2 years?

  £21
• Why does compound interest yield more money than simple interest over time?

  Because compound interest earns interest on the interest accumulated from previous periods.
• What is the compound interest formula?

  The compound interest formula is $A =$$P(1 + r)^n$.
• In the compound interest formula, what does A represent?

  A represents the final amount after compound interest has been applied.
• What does P stand for in the compound interest formula?

  P stands for the principal (initial investment).
• What does r represent in the compound interest formula?

  r represents the annual interest rate (in decimal form).
• What does n represent in the compound interest formula?

  n represents the number of years.
• If you invest £500 at 6% interest for 4 years, what is the final amount using the compound interest formula?

  £631.25
• What are the steps to calculate compound interest using the formula?

  1. Calculate the final amount (A) using the formula; 2. Subtract the principal (P) from the final amount (A).
• What is compounding frequency?

  Compounding frequency refers to how often interest is calculated and added to the principal.
• How much interest will you earn if you invest £2000 at 4% compound interest for 5 years?

  £433.31
• What are some common compounding frequencies?

  Annually, semi-annually, quarterly, monthly, and daily.
• How does compounding frequency affect the final amount?

  The more frequently interest is compounded, the more interest is earned.
• What is the formula for compound interest with different compounding frequencies?

  $A =$$P(1 + \frac{r}{n})^{nt}$
• If you invest £5000 at 6% interest for 2 years, which compounding frequency would yield the highest final amount?

  Daily compounding frequency.
• What are some real-world applications of compound interest?

  Savings accounts, investments, retirement planning, loans, and credit card debt.
• How much will Sarah have when she's 18 if she invests £500 now at 5% annual compound interest?

  £607.75
• What is the significance of compound interest over long periods?

  It demonstrates the power of earning interest on interest, leading to significant growth over time.
• What do the variables in the compound interest formula represent?

  A is the final amount, P is the principal, r is the annual interest rate (in decimal form), and n is the number of years.