Interest: Simple Interest
Samantha purchased a five-year municipal bond that pays simple interest for $600. After the bond matured five years later, she had received a total of $720 in principal plus interest payments. What is the interest rate of Samantha's bond?
Incorrect.
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This answer choice presents % interest earned over the entire period of five years. However, what did the question ask?
Incorrect.
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Incorrect.
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Incorrect.
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__Alternative Method__:
We know that $120 is 20% of $600. Since the interest earned is 20% over 5 years, the annual interest is
>$$\displaystyle \text{Annual interest rate} = \frac{20\%}{5}=4\%$$.
Correct.
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Given that the total amount Samantha received after the bond matured is
$720, she earned $120 ($$\$720 - \$600 = \$120$$) in interest over five years. Plug that information into the simple interest formula
>$$\text{Simple interest} = \text{Principal} \times \text{Interest rate} \times \text{Time}$$
> $$\$120 = \$600 \times r \times 5$$
> $$120 = 3{,}000 r $$
> $$\displaystyle \frac{120}{3{,}000} = r $$
> $$\displaystyle \frac{4}{100} = r $$
> $$ 4\% = r$$
4%
5%
10%
12%
20%
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