2.2 // What is interest? Flashcards
What is interest?
Money paid for using funds over a period of time.
What is simple interest?
Interest calculated as a percentage of the principal ,over a certain time period, usually annually.
What is compound interest?
Interest calculated when interest is added to the principal, the interest itself earns interest.
What formula is used to calculate simple interest?
I = PRT
What formula is used to calculate compound interest?
A = P( 1 + r/n )^nt
What is the annual percentage rate(APR)?
Simple interest calculated annually.
What is the annual percentage yield(APY)?
A version of compound interest. When advertised, it is the actual percentage rate your money will earn yearly with compound interest.
When borrowing money, ___ is advertised.
APR
When saving money, ___ is advertised.
APY
Why is APR advertised when borrowing money?
If you only carry your balance for one billing cycle, you pay the simple rate, but if you carry it for more than one cycle, the interest exceeds the said APR.
Why is APY advertised when saving money?
It is the percentage you earn compounding for one year. But, you earn less, if you take out money early or invest for less than a year.
What is the time-value of money?
The value of money at a given amount of interest earned over a given amount of time.
What factors affect the time-value of money?
Interest rate, time, and the amount invested.
How does interest rate affect the time-value of money?
A higher interest rate will earn more money in a given period of time compared to a lower one.
How does time affect the time-value of money?
The earlier you invest, the more time money has to compound and increase.