Finance Application – Interest Functions

Some word problems will require you to calculate the amount of interest that accrues on a given amount of money over a certain amount of time. In order to solve these problems, you will need to know the equation I = prt, in which I is interest, p is principle, r is rate of interest and t is time. Imagine the following scenario: $20 is placed into an account with an annual interest rate of 5%. How much interest will the money have accrued over 5 years? The principal is $20, the interest rate is 5% (for the purposes of calculation you will want to convert the percentage into a decimal, so 5% becomes 0.05), and the time is 5, so the equation can be set up: I = 20 x 0.05 x 5, yielding an answer of $5. Remember to make sure that if the interest rate is annual, the time needs to be in units of years as well (for instance, six months would become 0.5). Do not worry about compound interest or variable rates; the interest-related questions on the exam do not get so complex.


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Last updated: 01/25/2018
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