simple interest rate

datonman wrote:A sum of $16,000 amounts to $18,400 in two years according to simple interest. What is the rate of interest?

1.) 6%
2.) 6.5%
3.) 7.5%
4.) 8%

With simple interest, one's investment increases the SAME AMOUNT each year, based on the INITIAL investment.

$18,400 - $16,000 = $2400
So, the investment increased $2400 over 2 YEARS
$2400 ÷ 2 = $1200
So, the ANNUAL increase is $1200

The INITIAL INVESTMENT was $16,000
$1200/$16,000 = [spoiler]7.5%[/spoiler]

Cheers,
Brent

Hi datonman,

The two interest rate formulas that the GMAT could test you on are:

1) Simple Interest: Principal x (1 +rt)

2) Compound Interest: Principal x (1 + r)^t

In both formulas….

"Principal" represents the initial investment
"r" represents the interest rate, as a decimal
"t" represents the number of years

Given the information in this question, we'd use the Simple Interest Formula and plug in the values that we're given:

16,000 x (1 + r(2)) = 18,400

(1 + 2r) = 18,400/16,000

(1 + 2r) = 184/160

(1 + 2r) = 23/20

(1 + 2r) = 1.15

2r = 0.15

r = .075

Final Answer: [spoiler]7.5% or answer #3[/spoiler]

GMAT assassins aren't born, they're made,
Rich

datonman wrote:A sum of $16,000 amounts to $18,400 in two years according to simple interest. What is the rate of interest?

1.) 6%
2.) 6.5%
3.) 7.5%
4.) 8%

With simple interest, one's investment increases the SAME AMOUNT each year, based on the INITIAL investment.

$18,400 - $16,000 = $2400
So, the investment increased $2400 over 2 YEARS
$2400 ÷ 2 = $1200
So, the ANNUAL increase is $1200

The INITIAL INVESTMENT was $16,000
$1200/$16,000 = 7.5%

Cheers,
Brent