Compound Interest Practice
Question 1
Consider a $2000 loan
with the compound interest of 10% per year. The
duration of the loan is 2 years. Calculate the
interest after the 2nd year.
Answer
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Step by Step Solution
Step 1
Since the interest is compounding, we need to calculate the interest year by year. These are the information that we have:
- P is the loan amount or principal ($2000)
- r is the compound interest rate (10%)
- The loan duration is 2 years
Step 2
After the 1st year, we can find the interest I, by multiplying P with r. Here's how:
Step 3
Therefore, the interest after the 1st year is $200. With this, the amount of money that we owe after the 1st year is:
Step 4
After the 2nd year, since the interest is compounding, the interest will be 10% of $2200. Here's how we calculate for the interest:
Step 5
The interest for the end of 2nd year is $220. Clearly, the answer is C.
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