Multiple Choice
Which of the following formulas represents a present value factor?
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10. Time Value of Money
Time Value of Money Equations
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If you take out a loan of $678 at an annual interest rate of 12.5% (simple interest) for one year, how much interest will you pay on the loan at the end of the year?
A
$8.48
B
$84.75
C
$67.80
D
$95.25
Verified step by step guidance1
Step 1: Understand the formula for calculating simple interest, which is I = P × R × 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: Convert the annual interest rate from a percentage to a decimal by dividing it by 100. For 12.5%, this would be 12.5 ÷ 100 = 0.125.
Step 3: Identify the values given in the problem: Principal (P) = $678, Rate (R) = 0.125, and Time (T) = 1 year.
Step 4: Substitute the values into the formula: I = 678 × 0.125 × 1.
Step 5: Multiply the values together to calculate the interest. The result will give you the amount of interest paid at the end of the year.
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