Question

What is the calculation for determining simple interest and compound interest? Borrowing if borrowed $20,000 for 5 years at a 4% interest rate? What is total interest paid?

Answer 1

If using simple interest, the formula is:

= Amount * ( 1 + rate * time)

= 20,000 * ( 1 + 4% * 5)

= $24,000

Interest = Balance after 5 years - Investment

= 24,000 - 20,000

= $4,000

Using Compound Interest:

= Amount * ( 1 + rate)^time

= 20,000 * ( 1 + 4%)⁵

= $24,333.06

Interest = 24,333.06 - 20,000

= $4,333.06