Could someone help me clarify my answers?
Ping, a 19-year-old college student, just asked his mother if he could borrow $2,000 because he spent the rest of this semester’s loan money for the semester on a trip to Hawaii for spring break. His mother thinks he’s being very irresponsible with his money, so she says yes on one condition: she will charge him a simple interest rate of 10% annually. If he doesn’t pay his mother back until he graduates in two and a half years, how much interest will he owe her?
a. $250
b. $400
c. $500
d. None of these
If I put $2,000 in a Certificate of Deposit today, and the interest rate is 5% annually compounded quarterly, what will it be worth in two years?
a. $2208.97
b. $2100.53
c. $2200.00
d. $2050.25
I think the first one could be b or c
The second one could be b but at the same time I was told it was d.
For the first one….think about what the question is asking…
You have a loan with an interest charge of 10% a year.
2000(2.5 years) So break it down.
2000(.10) = 200 so you have to multiply that number times 2.5
200(2.5) = 500 so the answer is c.
For the second one, the interest is compounded, which means you will earn interest on the interest you earned previously.
The formula for compound interest is the following
P = C (1+r/n)^(nt)
P is the future value (the value you are trying to find)
C is the initial investment (2000)
r is the interest rate (.05)
n is the number of times you are compounding-in this case it is quarterly so you are doing it 4 times per year (4 quarters per year)
t is the number of years
P = 2000 (1+.05/4)^(4*8) = 2208.97
Hope this helps!
