What percentage interest rate is a loan that charges one hundred dollars in simple annual interest over 5 years on a one thousand dollar balance?
I = PRT
100 = 1,000 * R * 5
100 = 5,000R
100/5,000 = R
0.02 = R
Rate = 2%
To find the percentage interest rate on a loan, we can use the simple interest formula:
Simple Interest = Principal (P) * Interest Rate (R) * Time (T)
Given:
Principal (P) = $1000
Simple Interest = $100
Time (T) = 5 years
Let's rearrange the formula to solve for the interest rate (R):
Interest Rate (R) = Simple Interest / (Principal * Time)
Substituting the given values:
R = $100 / ($1000 * 5)
R = $100 / $5000
R = 0.02 or 2%
Therefore, the loan charges a 2% annual interest rate.