Question

The city is issuing bonds to raise money for a building project. You obtain a 6300$ bond that pays 2% interest annually that matures in 5 years. How much interest will you earn?

Answer 1

The amount earned after a given period of time on an amount invested at a given interest rate is expressed as

`\begin{gathered} A=P(1+rt)\text{ ---- equation 1} \\ where \\ A\Rightarrow amount\text{ earned} \\ P\Rightarrow amount\text{ invested} \\ r\Rightarrow interest\text{ rate} \\ t\Rightarrow time \end{gathered}`

Given that you obtain a $6300 bond that pays 2% interest annually that matures in 5 years, this implies that

`\begin{gathered} P=6300 \\ r=2\%=0.02 \\ t=5 \end{gathered}`

By substituting these values into the above formula, we have

`\begin{gathered} A=6300(1+(0.02*5)) \\ =6300(1.1) \\ =6930 \end{gathered}`

This implies that the amount earned after 5 years is $6390.

To evaluate the interest earned, we subtract the amount invested from the amount earned.

Thus,

`\begin{gathered} I=A-P \\ where \\ I\Rightarrow interest\text{ earned} \\ thus, \\ I=6930-6300 \\ \Rightarrow I=\$630 \end{gathered}`

Hence, the interest earned is evaluated to be

`\$630`