Final answer:
The amount of interest paid on the loan after 7 years and 11 months is calculated using the compound interest formula A = P(1 + r/n)^(nt), with P being the principal, r the annual interest rate, n the number of times interest is compounded per year, and t the time in years.
Step-by-step explanation:
To calculate the amount of interest paid on a demand loan of $10795.14 with an interest rate of 4.2% compounded annually, we need to use the formula for compound interest. The formula is A = P(1 + r/n)^(nt), where:
- P is the principal amount (initial loan), which is $10795.14,
- r is the annual interest rate (in decimal), so 4.2% becomes 0.042,
- n is the number of times that interest is compounded per unit t, and
- t is the time the money is invested for, which in this case is 7 years and 11 months (or 7.917 years).
We assume the interest is compounded once a year (n = 1). Therefore, the total amount A after 7.917 years can be calculated as:
A = 10795.14(1 + 0.042/1)^(1 * 7.917)
After solving this, we'll get the total amount A. The interest paid is then A minus the initial principal of $10795.14. We can now find the exact amount of interest paid.