Compound Interest Practice

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Question 2

The total amount of money that we need to pay back after 3 years for a $3000 loan is $3993 . Find the compound interest rate of the loan.


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Select and check your answer...

A. $2000
B. $3000
C. $4000
D. $5000

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 ($3993)
    • P is the principal
    • r is the interest rate per year (10 รท 100 = 0.1)
    • n is the loan duration in year (3 years).
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    Step 2

    With A=3993, r=0.1 and n=3, we can substitute these values into the formula as shown:

    using the compound interest formula to find the principal
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    Step 3

    Now we have, 1.331P = 3993. To find P, we need to remove 1.331. To do so, we divide both sides of the equation with 1.331. This is shown below:

    dividing both sides with 1.331 to find P
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    Step 4

    Finally, we have P = $3000. Clearly, the answer is B.