2.2 // What is interest? Flashcards

1
Q

What is interest?

A

Money paid for using funds over a period of time.

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2
Q

What is simple interest?

A

Interest calculated as a percentage of the principal ,over a certain time period, usually annually.

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3
Q

What is compound interest?

A

Interest calculated when interest is added to the principal, the interest itself earns interest.

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4
Q

What formula is used to calculate simple interest?

A

I = PRT

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5
Q

What formula is used to calculate compound interest?

A

A = P( 1 + r/n )^nt

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6
Q

What is the annual percentage rate(APR)?

A

Simple interest calculated annually.

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7
Q

What is the annual percentage yield(APY)?

A

A version of compound interest. When advertised, it is the actual percentage rate your money will earn yearly with compound interest.

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8
Q

When borrowing money, ___ is advertised.

A

APR

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9
Q

When saving money, ___ is advertised.

A

APY

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10
Q

Why is APR advertised when borrowing money?

A

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.

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11
Q

Why is APY advertised when saving money?

A

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.

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12
Q

What is the time-value of money?

A

The value of money at a given amount of interest earned over a given amount of time.

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13
Q

What factors affect the time-value of money?

A

Interest rate, time, and the amount invested.

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14
Q

How does interest rate affect the time-value of money?

A

A higher interest rate will earn more money in a given period of time compared to a lower one.

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15
Q

How does time affect the time-value of money?

A

The earlier you invest, the more time money has to compound and increase.

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16
Q

How does the amount invested affect the time-value of money?

A

If you invest more money, the value will increase faster.

17
Q

Using the rule of 72, how would you find the time needed to double money with a given interest rate?

A

Time needed = 72/interest rate(as an actual number)

18
Q

Using the rule of 72, how would you find the interest rate needed to double money with a given time period?

A

Interest rate = 72/number of years