Compound interest adds interest to the balance, then charges interest on that new total. Simple interest does not. A = P(1 + r)^t for compounding once per year. $400 at 5% for 2 years is 400 × (1.05)² = $441, which is $41 of interest, not $40. Simple interest is in simple interest.
Count the compounds
If interest compounds twice a year, the rate per period is r divided by 2, and the number of periods is 2t. The ACT usually keeps t small so you can multiply 1 + r by itself rather than hunt for a button. Percents as decimals are in percent problems.
Time in months still has to become years or periods, in unit conversions. Word-problem setup is in setting up word problems.
The bottom line
Multiply the principal by (1 + r) once per compounding period. Do not use I = Prt unless the problem says simple interest.
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