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Suppose that you borrow $2000.00 from a friend and promise to pay back $3600.00 in 4 years. What simple interest rate will you pay?

1 Answer

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Simple Interest

The interest earned is calculated as follows:

I=P.r.t

Where:

I=Interest

P=initial principal balance

r=interest rate

t=time

If I borrow $2000 from a friend, that amount of money is the principal. P = $2000.

We agree to have him paid back $3600. This includes the principal and the interest, thus:

I = $3600 - $2000 = $1600

That amount of interest is earned in t=4 years.

From the formula above, we can solve for r as follows:


r=(I)/(P\cdot t)

Substituting:


r=(1600)/(2000\cdot4)=(1600)/(8000)=0.2

This means the interest rate is 20%

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