Compound Interest Practice

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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.


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Select and check your answer...

A. $180
B. $200
C. $220
D. $240

Step by Step Solution

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    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
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    Step 2

    After the 1st year, we can find the interest I, by multiplying P with r. Here's how:

    using the simple interest formula
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    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:

    Amount owed after the 1st year is $2200
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    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:

    The interest after the 2nd year is $220
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    Step 5

    The interest for the end of 2nd year is $220. Clearly, the answer is C.