Question

A bank offers a loan for $10,000 which earns 4.25% interest compounded annually. What is the correct formula to determine how much someone would owe the bank if they took out this $10,000 loan for 5 years?

A = 10,000(1 + 5)^4.25


A = 10,000(1 + 0.0425)^5


A = 10,000(1 - 0.0425)^5


A = 10,000(0.0425)(5)

Answer 1

A = 10,000(1 + 0.0425)^5

Explanation:

The formula for calculating annually compounded interest is:

`A= N(1+r)^t`

Where A is the final loan amount; N is the initial amount loaned, in dollars; r is the annual interest rate and t is the length of the loan, in years.

In this loan, the initial amount is 10,000, the interest rate is 0.0425 and the length of the loan is 5 years. Therefore, the expression that describes the loan is:

`A = 10,000(1+0.0425)^5`