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19 November, 05:08

Lenny borrowed $10,000 on a 5-year interest bearing note with an interest rate of 10%. At the end of 5 years, Lenny must repay the bank $16,105. Based on the amount that must be repaid, interest was calculated with what type of interest rate?

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  1. 19 November, 08:46
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    compound interest

    Explanation:

    If the note carried simple interest, then Lenny should repay:

    $10,000 + ($10,000 x 5 years x 10%) = $10,000 + $5,000

    If the note carried compound interest, then Lenny should repay:

    $10,000 x (1 + r) ⁿ = $10,000 x (1 + 10%) ⁵ = $10,000 x 1.6105 = $16,105

    Compound interest is interest charged over previously earned interest.
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Home » Business » Lenny borrowed $10,000 on a 5-year interest bearing note with an interest rate of 10%. At the end of 5 years, Lenny must repay the bank $16,105. Based on the amount that must be repaid, interest was calculated with what type of interest rate?
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