Compound Interest Practice

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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.


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Select and check your answer...

A. $1600
B. $2600
C. $3600
D. $4600

Step by Step Solution

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    Step 1

    We start with the compound interest formula:

    compound interest formula


    • 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 รท 100 = 0.2)
    • n is the loan duration in year (2 years).
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    Step 2

    With P=5000, r=0.2 and n=2, we can substitute these values into the formula as shown:

    using the compound interest formula
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    Step 3

    The total amount that we need to pay back is $6655. Hence, the answer is C.