Math Problem Statement

Compute the specified quantity. A 7 year bond costs $3,000 and will pay a total of $200 interest over its lifetime. What is its annual interest rate r (as a percent)? (Round your answer to three decimal places.) r = %

Solution

To determine the annual interest rate rr, we need to use the information provided. The bond has a lifetime of 7 years and will pay a total of $200 in interest. The cost of the bond is $3,000.

The annual interest rate can be calculated using the formula for simple interest:

I=P×r×tI = P \times r \times t

Where:

  • II is the total interest earned,
  • PP is the principal (initial cost of the bond),
  • rr is the annual interest rate (in decimal form),
  • tt is the time in years.

In this case:

  • I=200I = 200 (total interest),
  • P=3000P = 3000 (principal),
  • t=7t = 7 (time in years).

Rearranging the formula to solve for rr:

r=IP×tr = \frac{I}{P \times t}

Substitute the known values:

r=2003000×7r = \frac{200}{3000 \times 7}

r=20021000r = \frac{200}{21000}

r0.009524r \approx 0.009524

To express rr as a percentage, multiply by 100:

r0.9524%r \approx 0.9524\%

So, the annual interest rate is approximately:

r0.952%r \approx 0.952\%

Would you like any further explanation or details on this? Here are 5 related questions you might want to explore:

  1. How would the interest rate change if the bond lasted for 10 years instead of 7?
  2. What would be the total interest if the interest rate was compounded annually?
  3. How can you calculate the future value of this bond if it had compounded interest?
  4. How would increasing the bond price affect the interest rate?
  5. What is the difference between simple interest and compound interest?

Tip: Remember, interest rates can be expressed either as percentages or decimals, but calculations often require the decimal form.

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Math Problem Analysis

Mathematical Concepts

Simple Interest
Algebra

Formulas

I = P * r * t
r = I / (P * t)

Theorems

Simple Interest Theorem

Suitable Grade Level

Grades 10-12