Question

ariane borrows $400 on a 4-year loan. she is charged 5% simple interest per year . How much interest is she charged for 4 years? what is the total amount she has to pay back?

Answer 1

1. Interests charged for 4 years: $80
2. Total amount to pay back:$480

Explanation:

• To know the future value of an specific amount that is borrowed from a bank we use the following equation:
  `FV= PV\imes{(1+n*{i})}`, where FV is future value, PV present value, n the amount of periods and i the interest rate.
• In this particular case, the present value of the loan is $400, n=4 (4 years), i=5%. Then the future value equals:
  `FV= 400*(1+4*0.05)`. Then FV= $480, which is the total amount of money she would have to return in 4 years.
• The interest paid can be calculated as the total amount paid ($480) minus the inicial loan ($400), which means that total interests paid= FV- PV= $80.