Mr. Smith borrowed $22,000 to purchase stock for his baseball card shop. He repaid the simple...

Question:

Mr. Smith borrowed $22,000 to purchase stock for his baseball card shop. He repaid the simple interest loan after two years. He paid interest of $6,420.

What was the interest rate?

Simple Interest:

Simple interest is calculated by multiplying the principal amount by interest rate and terms of the loan. Simple interest loan first applies the amount paid each period on interest charge while the remaining amount is applied to the principal amount. Unlike compound interests which adds back some of the interest on the loan, simple interest does not accrue.

Answer and Explanation:

The simple interest rate is calculated using the following formula.

  • Simple interest amount= Principal * Interest rate * Term of the loan

Therefore,

  • $6,420 = $22,000 * Rate * 2

We will let X represent the interest rate.

  • $6,420 = $22,000 * X * 2
  • $6,420 = 44,000x

We solve for x

  • {eq}\frac{6,420}{44,000} = x {/eq}
  • {eq}0.1459 = x {/eq}

so.

  • Simple interest rate = 0.1459 * 100
  • Simple interest rate = 14.59%

Learn more about this topic:

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How to Calculate Interest Expense: Formula & Example

from Financial Accounting: Help and Review

Chapter 5 / Lesson 18
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