Algebra homework

Question

Interest formula 1=prt, I =interest, p=principal, r= annual interest rate, T=time (years). Future value formula A=p(1+er). A=future value, p=principal, r=annual interest rate, t=time. Find the simple interest owed for each loan. So $1200 at 7% for 3 year and $1700 at 10.5% for 8 months.

Answer 1

With the simple way of calculating interest, I = prt, for the $1,200 amount:

I = 1,200 * 0.07 * 3

I = $252

So $252 is owed. But this doesn't account for the fact that the interest is applied each year, and after the first year interest is earned on interest. To account for this compounding, use the compound interest formula which you can find easily:

A = P(1 + [r/n])^nt

A = 1,200(1 + 0.07/1)^{1 * 3}

A = $1,470.05

So $270.05 is owed according to the compound interest formula. This is the one to use if, for example, you have money in a bank account in which interest is paid yearly.