A bank offers a CD that pays a simple interest rate of 6.5​%. How much must you put in this CD now in order to have ​$2500 for a​ home-entertainment center in 3 years.

Question

The present value that must be invested to get

​$2500 after 3 years at an interest rate of 6.5%

Answer 1

Simple Interest Rate formula: A = P(1+rt)

1. First, always look for what you are asked to find. Here it is how much you must put into a CD. Therefore, P will be the variable you solve for.
2. $2500 represents the output that you want. Anytime you are given a number that is an output, you can assume it is what the formula will equal. So replace A with 2500.
3. You must convert the percent into a decimal. To do this, move the decimal to the left two times. Replace r with .065
4. t represents time. You can replace t with 3.

Your equation should now look like 2500 = P(1 + 0.065 x 3)

There are multiple ways to solve. The best would be to simplify everything in the parentheses.

2500 = P(1 + 0.195)

2500 = P(1.195)

Now that you have simplified, you can isolate the variable. To do this, do the opposite operation being done to the variable (P is getting multiplied by 1.195, so you must divide by 1.195 on both sides of the equation).

2,092.05 = P

*round to the nearest hundredth because we are dealing with money.

Answer: You must put $2,092.05 into a CD in order to get $2500 in three years.