Question

1. Steve wants to buy a guitar. The model he wants costs $500.00. He can put down $100, but will need to take out a loan for the remaining $400. If he is charged an interest rate of 8%, about how much interest will he pay on the guitar in one year?

Answer 1

Answer:

In one year he will pay about $32 in interest

Step-by-step explanation:

Simple Interest

Interest is calculated on the original principal only of a loan or on the balance of an account.

Unlike compound interest where the interest earned in the compounding periods is added to the new principal, simple interest only considers the principal to calculate the interest.

The interest earned is calculated as follows:

I=P.r.t

Where:

I = Interest

P = initial principal balance

r = interest rate

t = time

Steve paid a down payment of $100 for a guitar that costs $500, therefore he stills owes P=$500-$100=$400. This is the principal amount that will be paid at an interest rate of 8% = 0.08. In t=1 year, he will pay in interest:

I = $400*0.08*1

I = $32.

In one year he will pay about $32 in interest