Question

Michael has been saving his money and wants to invest it. After doing some research, he has decided to invest $20,000 into a Certificate of Deposit. The interest rate on the CD is 3% with a term of five years, and the interest is paid out annually. Based on recent inflation, Michael is planning on an annual inflation rate of 2%. How much interest will Michael earn on this CD in the first year, based on the nominal interest rate? $400 $600 $800 $1,000.

Answer 1

The consideration given to the bank for providing loan facility, in return of such facility an amount is paid which is over and above the principle amount of loan, this amount can be said as interest.

Interest are of two types i.e. (a) Simple interest (b) compound interest

simple interest

The amount of interest which is calculated at a fixed predetermined rate every year on the principle amount and paid until the loan is settled in full.

Given in the Question

Principle is $20,000

Rate is 3%

Time is 1 year

Calculation

The simple interest is calculated by multiplying principle with the rate and than the outcome is multiplied with time to find simple interest.

$\begin{aligned} \rm \ Simple\:Interest&= Principle \times Rate \times Time\\ \\ \rm \ Simple\:Interest&= \ 20,000 \times 3 \times 1\\ \\ \rm \ Simple\:Interest&= \ 600 \end$

Therefore the amount of interest received by Michael at the end of first year on an amount of $20,000 at a interest rate of 3%will be $600.

Learn more about simple interest here:

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