Money word problem

Question

A savings bond is currently worth $7600 at %5.5 annual simple interest each year. If the bond was purchased 7 years ago, how much was it bought for? Round to the nearest cent.

Answer 1

The formula for simple interest is I = P*R*T  where 

 

I = Interest earned

P = Principal or original amount

R = interest rate as a decimal  =  0.055 in this case

T = Time   = 7 years in this case

 

The current worth of the bond is the sum of the Principal (original amount) and the Interest earned.  So 

 

P + I = P + P*R*T = 7600

P(1 + R*T) = 7600

P = 7600 / (1 + R*T) 

P = 7600 / (1 + 0.055*7)

P = 7600 / (1 + 0.385)

P = 7600 / 1.385

P = $5487.36 to the nearest cent

 

Check:  5487.36*0.055*7 = 2112.63 interest earned

            5487.36 + 2112.63 = $7599.99 current worth