Multiple Choice
In a standard loan amortization schedule, what happens to the amount of principal paid with each successive payment over time?
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10. Time Value of Money
Time Value of Money Equations
Multiple Choice
What is the simple interest earned on an amount of \$1,000 at an annual interest rate of 4% for 2 years?
A
\$400
B
\$40
C
\$80
D
\$20
Verified step by step guidance1
Step 1: Understand the formula for calculating simple interest, which is: \( I = P \times R \times T \), where \( I \) is the interest, \( P \) is the principal amount, \( R \) is the annual interest rate (expressed as a decimal), and \( T \) is the time in years.
Step 2: Identify the values given in the problem: \( P = 1000 \), \( R = 4\% \) (convert to decimal as \( 0.04 \)), and \( T = 2 \) years.
Step 3: Substitute the values into the formula: \( I = 1000 \times 0.04 \times 2 \).
Step 4: Perform the multiplication step-by-step: First, multiply \( 1000 \times 0.04 \), then multiply the result by \( 2 \).
Step 5: The result of the calculation will give you the simple interest earned over the 2-year period.
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