Suppose you borrow 560 for a term of five years at simple interest and 2.06% APR.
Determine the total (principal plus interest) you must pay back on the loan.
Solution:-
The future payoff, F, which is principal plus interest, obeys the formula F = P(1 + tr), where P is the principal, r is the APR expressed as a decimal, and t is term of the loan in years.
Since the formula requires that the interest rate be written as a decimal, begin by writing the APR of 2.06% as a decimal. To convert a percentage to a decimal, divide by 100.
2.06% = 0.0206
Identify P. Remember that P is the principal, or present value. It is the amount initially borrowed.
P = 560
Identify t. Remember that is the term of the loan in years.
t = 5
Now substitute 560 for P, 0.0206 for r, and 5 for t in formula.
F = P(1 + tr)
= 560 (1 + 0.0206*5)
617.68
Therefore, the total (principal plus interest ) you must pay back on the loan is 617.68.