# Banking Understanding Interest

How many calculation periods are in one year when the interest is calculated monthly?

12

What is the Rule of 72?

Tells you how many years are required to double your money at a given interest rate

Explain the Time Value of Money (TVM) concept.

Assumes money can be placed in interest and will increase in value over time because it will earn compound interest.

What is the formula for simple interest?

SI= P x R x Y

When is simple interest ever used? Why?

used when a bank is not involved because it’s simpler and easier than compound interest

What happens to the principal when calculating simple interest?

the principal remains constant

What is principal?

an original amount of money loaned or borrowed

What is the Future Value (compound interest) formula?

FV= P (1+R)y

What is the Present Value formula?

PV= FV ÷ (1+R) y

The annual interest rate is also known as the ____________________ interest rate.

nominal

What is the present value of $10,286 when the APR is 6% and the money has grown for 40 years?

$1,000

How much compound interest will be earned when $25,000 is deposited in an interest-bearing account when the APR is 8% and the money is left in the account for 40 years? Hint: Interest earned=FV-PV

$518,113

How is the interest rate specified in calculations?

as a decimal fraction

Give an example of interest working against you. Give an example of interest working for you.

working against is if you have to pay interest on a credit card and working for you is when you’re earning interest on a savings account

What is the process where calculated interest becomes part of the principal for the next interest calculation?

Time Value of Money or Compounding

What is the period interest rate when the annual interest rate is 12% and the interest is calculated quarterly?

3%

How many calculation periods are in one year when the interest is calculated semi-annually?

2

What is the present value of $10,000 when the APR is 4% and the money has grown for 30 years?

$3,084

How much compound interest will be earned when $5,000 is deposited in an interest-bearing account when the annual interest rate is 6% and the money is left in the account for 40 years?

$46,429

Who said, “Compounding was man’s greatest invention….”?

Albert Einstein

What does the principal growth factor tell us?

It tells us how much money grows overtime due to compound interest

what is the growth factor formula?

GF+ (1 + R)y