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The amount of money in an account after is has been earned interest is $1080, the principle is $1000, and the time is 2 years. What is the annual interest rate?

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Answer:

4%

Explanation:

We assume the interest earned is simple interest, because that make the numbers come out "nice."

The account balance is given by ...

A = P(1 +rt) . . . . principal P earns simple interest at annual rate r for t years

1080 = 1000(1 +r·2) . . . . fill in the given values

1.08 = 1 +2r . . . . . . . . . . divide by 1000

0.08 = 2r . . . . . . . . . . . subtract 1

0.04 = r = 4% . . . . . . . divide by 2

The annual interest rate is 4%.

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Additional comment

If interest is compounded annually, the annual rate is about 3.92%. If it is compounded continuously, the rate is about 3.85%.

User Marek Maszay
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