3.2 Compound and Continuous Compound Interest

Question 1

What is compound interest?

Answer 1

If at the end of a payment period the interest due is reinvested at the same rate, then the interest as well as the original principal will earn interest during the next payment period. Interest paid on interest reinvested is called compound interest.

Question 2

What is the rate per compounding period? How do you find it?

Answer 2

Since interest rates are generally quoted as annual nominal rates, the rate per compounding period is found by
dividing the annual nominal rate by the number of compounding periods per year.

Question 3

What is the formula for Compound Interest?

Answer 3

Question 4

Which of the compound interest formulas are best to use when?

Answer 4

Question 5

What is “compounded continiously” and the “continious compound interest formula?

Answer 5

Question 6

What are the simularities between the continious compound interest formula and the formula used to model population growth?

Answer 6

Question 7

How can we solve for n in the formula

A=P(1 + i)^n

Answer 7

Question 8

How do we find the growth time of an investment?

Answer 8

Finally, if we solve the compound interest formula for n (or the continuous com-pound interest formula for t), we can determine the growth time of an investment—the time it takes a given principal to grow to a particular value (the shorter the time, the greater the return on the investment).

Question 9

What is APY? How do you find it?

Answer 9

Question 10

Theorem: Annual Percentage Rate

Answer 10