Math Problem Statement
Suppose that a loan of $7500 is given at an interest rate of 7% compounded each year. Assume that no payments are made on the loan. Follow the instructions below. Do not do any rounding. (a) Find the amount owed at the end of 1 year. (b) Find the amount owed at the end of 2 years.
Solution
To find the amount owed on the loan with compound interest, we use the formula for compound interest:
where:
- is the amount owed after time ,
- is the principal amount (initial loan amount),
- is the annual interest rate (expressed as a decimal),
- is the number of times interest is compounded per year,
- is the time the money is invested or borrowed for, in years.
In this problem:
- dollars,
- (7% expressed as a decimal),
- (interest is compounded once per year).
(a) Amount owed at the end of 1 year
Here, :
So, the amount owed at the end of 1 year is .
(b) Amount owed at the end of 2 years
Here, :
So, the amount owed at the end of 2 years is .
Would you like more details on this process or have any other questions?
Here are some additional questions related to this topic:
- How would the amount owed change if the interest rate was 5% instead of 7%?
- What would be the amount owed after 5 years with the same 7% interest rate?
- How does the frequency of compounding (e.g., semi-annually, quarterly) affect the total amount owed?
- What is the formula for continuously compounded interest?
- How can you calculate the effective annual rate (EAR) from the nominal rate?
- What are some practical implications of compound interest in personal finance?
- How does compound interest compare to simple interest over long periods?
- What strategies can borrowers use to minimize the amount of interest paid on loans?
Tip: When dealing with compound interest, always ensure that the interest rate and the compounding periods are correctly matched in your calculations to avoid errors.
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Math Problem Analysis
Mathematical Concepts
Compound Interest
Exponential Growth
Formulas
Compound Interest Formula: A = P(1 + r/n)^(nt)
Theorems
-
Suitable Grade Level
High School
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