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Questions and Answers
What is simple interest primarily calculated on?
What is simple interest primarily calculated on?
- The principal amount only (correct)
- The total amount including interest
- The accumulated interest from previous years
- The annual payment plan
How does compound interest differ from simple interest?
How does compound interest differ from simple interest?
- Compound interest is always less than simple interest
- Compound interest does not earn interest itself
- Compound interest includes interest on both principal and past interest (correct)
- Compound interest is fixed every year
If Php 16,500 is invested at an interest rate of 13% compounded annually for 6 years, how is the compound amount determined?
If Php 16,500 is invested at an interest rate of 13% compounded annually for 6 years, how is the compound amount determined?
- By calculating the principal and then adjusting for inflation every year
- By adding the principal to 13% of the principal multiplied by 6
- By applying the compound interest formula which compounds the interest over the investment period (correct)
- By only using the principal and annual interest rate for calculations
If Ana borrowed Php 11,500 at an interest rate of 9% compounded annually for 5 years, what aspect of compound interest is relevant to calculating the amount Jane will receive?
If Ana borrowed Php 11,500 at an interest rate of 9% compounded annually for 5 years, what aspect of compound interest is relevant to calculating the amount Jane will receive?
Which of the following best represents the key feature of compound interest?
Which of the following best represents the key feature of compound interest?
Flashcards
Simple Interest
Simple Interest
Interest calculated only on the initial principal amount.
Compound Interest
Compound Interest
Interest calculated on both the principal and the accumulated interest from previous periods.
Principal
Principal
The original amount of money invested or borrowed.
Compound Amount
Compound Amount
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Interest Rate
Interest Rate
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Study Notes
Simple and Compound Interest
-
Simple interest is calculated only on the principal amount
-
Compound interest is calculated on the principal plus accumulated interest
-
The formulas for simple interest are provided as Is = Prt
- Where
- Is = Simple Interest
- P = Principal
- r = simple interest rate
- t = term of time in years
- Where
-
The formula for compound interest is A = P(1+r)t
- Where
- A = the future value of the investment/loan, including interest
- P = the principal investment amount (the initial deposit or loan amount)
- r = the annual interest rate (decimal)
- t = the time the money is invested or borrowed for, in years
- Where
Definitions
- Principal (P): The initial amount of money invested or borrowed.
- Interest Rate (r): The percentage rate at which interest is calculated per year.
- Time (t): The duration (in years) of the investment or loan.
- Simple Interest (Is): Interest calculated only on the principal amount.
- Compound Interest (Ic): Interest calculated on the principal and accumulated interest.
- Lender or Creditor: The person or institution who provides the funds.
- Borrower or Debtor: The person or institution who receives the funds,
- Origin or loan date: The date on which money is received by the borrower.
- Repayment date or maturity date: The date on which the borrowed amount is to be repaid.
Examples
- Examples of simple interest calculations are provided which include finding the interest earned with given principal, rate, and time.
- Examples of compound interest calculations are provided with given principal, rate, and time.
- Practical problem scenarios (such as a bank loan and business start up capital) are provided to illustrate simple and compound interest calculations.
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