Your rich Uncle Ralph is willing to loan you $50,000 for five months and asks that you repay your loan with monthly compounding interest at the rate of 24% per year. How much interest will you pay?

Question

Quizplus · Accepted Answer

The interest can be calculated using the formula for compound interest: A = P(1 + r/n)^(nt), where A is the amount of money accumulated after n years, including interest, P is the principal amount ($50,000), r is the annual interest rate (24%, or 0.24), n is the number of times that interest is compounded per year (in this case, monthly compounding means n = 12), and t is the time the money is invested or borrowed for, in years (5 months = 5/12 years). Plugging in the values: A = 50000(1 + 0.24/12)^(12*(5/12)) = 55204. The interest paid is A - P = 55204 - 50000 = $5204.

Your Rich Uncle Ralph Is Willing to Loan You $50,000