Terry deposits a principal amount of 500 in a savings account that earns an annual rate of simple interest. If he makes no deposits or withdrawals, he will earn 40 in simple interest in 4 years. What is the annual rate of simple interest?

Solution

T erry d e p os i t s a p r in c i p a l am o u n t o f 500 in a s a v in g s a cco u n t t ha t e a r n s an ann u a l r a t e o f s im pl e in t eres t . I f h e mak es n o d e p os i t s or w i t h d r a w a l s, h e w i ll e a r n 40 in s im pl e in t eres t in 4 ye a rs . Wha t i s t h e ann u a l r a t e o f s im pl e in t eres t ?

Rate : 2%

Solution steps

Translate the problem into an equation:

40 = 500 r \cdot 4

Solve for

r, 40 = 500 r \cdot 4 : r = 2%

Rate : 2%