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Interest

Interest

From the course: Test Prep: GRE

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Interest

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- In this video I'm going to go over simple interest and compound interest word problems. So let's just look at the one on the left. If $5,000 is invested at a simple interest rate of 2%, what is the value after three years? So let me just kind of explain this to you in layman's terms and then we'll use a formula as well. Simple interest I don't think happens a whole lot in the real world but here's how it would work. 5,000 bucks would earn 2% after the first year and 2% of 5,000 is 100 so after one year the person would have 5,100 bucks and unfortunately for them I guess after the second year they'd just earn on the original principal 2% so after the second year they'd have 5,200, after the third year they'd have 5,300 and so on, so the way that we do this if perhaps you have a more complicated scenario is that simple interest is calculated by saying that the value of the investment equals the principal, which is the initial amount invested times one plus the interest rate times the…

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