Instructions
Read each question carefully and show your work for calculations. Write your answers in the spaces provided.
1. Understanding Compound Interest
Compound interest is calculated on the initial principal and also on the accumulated interest of previous periods. The formula for calculating compound interest is:
A = P(1 + r/n)^(nt)
Where:
- A = the future value of the investment/loan, including interest
- P = the principal investment amount (initial deposit or loan amount)
- r = the annual interest rate (decimal)
- n = the number of times that interest is compounded per year
- t = the number of years the money is invested or borrowed
2. Problem 1
A principal of $1,000 is invested at an annual interest rate of 5% compounded annually for 3 years. Calculate the total amount after 3 years.
Principal (P):
Rate (r):
Time (t):
Number of times compounded per year (n):
Total Amount (A):
3. Problem 2
Suppose you invest $2,500 at an annual interest rate of 4% compounded quarterly for 5 years. What will be the future value of the investment?
Principal (P):
Rate (r):
Time (t):
Number of times compounded per year (n):
Total Amount (A):
4. Problem 3
You take out a loan of $5,000 with an annual interest rate of 6% compounded monthly. Calculate the total amount to be repaid after 2 years.
Principal (P):
Rate (r):
Time (t):
Number of times compounded per year (n):
Total Amount (A):
5. Reflection
Why do you think understanding compound interest is important for personal finance? Write a brief response: