Question

1. Joe Plumber has borrowed $5,000,000 to start his “Jack of All Trades Handyman” business for 5 years at 10% per year compounded interest. Joe will make no payments until the loan is due. How much should Joe expect to pay for principal and interest at the end of the five years? How much must he pay for total interest over this period?
   

Answer 1

Principal = $5000000

Interest rate= 10%

Time= 5yrs

Simple Interest= P x R x T ÷ 100, where P = Principal, R = Rate of Interest and T = Time Period of the Loan/Deposit in years.

SI = 5000000×10×5÷100

SI = $2500000

Amount = SI+P

= $7500000

Joe has to pay $5000000 as Principal and $2500000 as simple interest.

Compound interest =The formula for compound interest is P (1 + r/n)^(nt), where P is the initial principal balance, r is the interest rate, n is the Time taken.

= 5000000(1+0.10)^5

A= $8,052,550.00

Compound Interest = A-P

= $3,052,550.00

Amount paid on Interest by Joe at the end of 5 years= Compounded interest - Simple Interest

=$552550