A principal amount of $5,000 was invested in a savings account for 5 years.The interest earned was $500.Use the simple interest formula to find the annual rate of interest. Hi,If you invest $5,000 for one year at an interest rate of r [maybe 5% (r = 0.05) or 3% (r = 0.03)] then at the end of the year you have the amount invested [$5,000] plus the interest [r*$5,000]. That is at the end on one year you have In the second year you are investing $5,000*(1+r) [this is the new principle] and hence the return at the end of the second year is Thus at the beginning of the third year the principle is $5,000*(1+r)^{2} and hence the return at the end of the third year is $5,000*(1+r)^{3} Continuing in this way the return after 5 years is In your problem the interest after 5 years is $500 so the total return after 5 years is $5,000 + $500 = $5,500. Hence
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