Compound Interest Practice
Question 1
Calculate the total amount of money that we need
to pay back for a $2500 loan with a compounding interest rate of 20%. The
duration of the loan is 2 years.
Answer
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Step by Step Solution
Step 1
We start with the compound interest formula:
Where:
Where:
- A is the total amount of money (including interest) after n years
- P is the principal ($5000)
- r is the interest rate per year (20 ÷ 100 = 0.2)
- n is the loan duration in year (2 years).
Step 2
With P=5000, r=0.2 and n=2, we can substitute these values into the compound interest formula as shown below:
Step 3
The total amount that we need to pay back is $6655. Hence, the answer is C.
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