Question

Penelope's average balance checking account pays simple interest of 1.2% annually, and she made $1.25 in interest last month. What was Penelope's average balance last month?

A. $12.50
B. $125
C. $1250
D. $1.25

Answer 1

If the annual simple interest is 1.2% then, the monthly interest would be 0.1%. The amount of interest, I, that needs to be paid is calculated through the equation,
I = P x r
where P is the principal. In this case, P is the unknown average balance last month, r is the rate.
1.25 = P x 0.001
P from the equation above is equal to $1,250. Thus, the answer to this item is letter C.