Hello,
These are from MGMAT Guide 1 (5th edition):
4) A car loan is offered at 8% annual interest, compounded annually. After the first year, the interest due is $240. What is the principal on the loan?
[spoiler]Ans: $3000[/spoiler]
8) Lori deposits $10,000 in a savings account at 10% annual interest, compounded annually. After 3 years, what is the balance on the account? (Assume Lori makes no deposits or withdrawals)
[spoiler]Ans: $13,310[/spoiler]
Can you please explain how to solve these compound interest problems. Thanks for your help.
Best Regards,
Sri
Compound interest problems
This topic has expert replies
-
- Legendary Member
- Posts: 641
- Joined: Tue Feb 14, 2012 3:52 pm
- Thanked: 11 times
- Followed by:8 members
- eagleeye
- Legendary Member
- Posts: 520
- Joined: Sat Apr 28, 2012 9:12 pm
- Thanked: 339 times
- Followed by:49 members
- GMAT Score:770
You need to know how to calculate simple and compound interest.
For simple interest: Simple Interest SI = P*r*t/100 (Where P is the principal, r is the rate and t is the time).
For compound interest: Total amount after time t = A = P*(1+r/100)^t.
So Compound interest = CI = A-P.
A car loan is offered at 8% annual interest, compounded annually. After the first year, the interest due is $240. What is the principal on the loan?
Since the loan is compounded annually, and the question asks for one year. Simple and compound interest are the same.
We have simple interest = 240 = P*8*1/100 => P = 100*240/8 = 3000$.
Lori deposits $10,000 in a savings account at 10% annual interest, compounded annually. After 3 years, what is the balance on the account? (Assume Lori makes no deposits or withdrawals)
Balance amount = A = P* (1+r/100)^3 = 10000* (1.1)^3 = 10*11^3 = 13310.
For simple interest: Simple Interest SI = P*r*t/100 (Where P is the principal, r is the rate and t is the time).
For compound interest: Total amount after time t = A = P*(1+r/100)^t.
So Compound interest = CI = A-P.
A car loan is offered at 8% annual interest, compounded annually. After the first year, the interest due is $240. What is the principal on the loan?
Since the loan is compounded annually, and the question asks for one year. Simple and compound interest are the same.
We have simple interest = 240 = P*8*1/100 => P = 100*240/8 = 3000$.
Lori deposits $10,000 in a savings account at 10% annual interest, compounded annually. After 3 years, what is the balance on the account? (Assume Lori makes no deposits or withdrawals)
Balance amount = A = P* (1+r/100)^3 = 10000* (1.1)^3 = 10*11^3 = 13310.
-
- Legendary Member
- Posts: 641
- Joined: Tue Feb 14, 2012 3:52 pm
- Thanked: 11 times
- Followed by:8 members
Hello Eagleeye,eagleeye wrote:You need to know how to calculate simple and compound interest.
For simple interest: Simple Interest SI = P*r*t/100 (Where P is the principal, r is the rate and t is the time).
For compound interest: Total amount after time t = A = P*(1+r/100)^t.
So Compound interest = CI = A-P.
A car loan is offered at 8% annual interest, compounded annually. After the first year, the interest due is $240. What is the principal on the loan?
Since the loan is compounded annually, and the question asks for one year. Simple and compound interest are the same.
We have simple interest = 240 = P*8*1/100 => P = 100*240/8 = 3000$.
Lori deposits $10,000 in a savings account at 10% annual interest, compounded annually. After 3 years, what is the balance on the account? (Assume Lori makes no deposits or withdrawals)
Balance amount = A = P* (1+r/100)^3 = 10000* (1.1)^3 = 10*11^3 = 13310.
Thank you very much for your excellent explanation and also for the formula. It is clear now. Thanks again.
Best Regards,
Sri