GRE Exam: A Simple Guide To Part-to-Whole Relationships - Simple and Compound Interest

Though tested rarely, these topics are worthwhile to learn if you are aiming for a high GRE score.

The formula for simple interest is
principal × rate × time

Example: If Bob invested $800 at 5% simple annual interest, how much interest did his investment earn after 5 years?
SOLUTION: the interest accrued = principal × rate × time = $800(0.05)5 = $200.

The formula for compound interest is

where p = principal, r = rate, n = number of times per year, and t = number of years.

Example: If Bob invested $5,000 at 5% compound annual interest. What was the dollar amount of the investment after 3 years, rounded to the nearest dollar?
SOLUTION: $5,000 = p, 5% = r, n = 1, and t = 3. Thus the amount of the investment is 5,000(1.05)3 = $5,788.125 ≈ $5,788