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A friend with 1,000 dollars principal earning 40 dollars in year one has an interest rate of:
A14 percent
B4 percent
C40 percent
D0.4 percent
Answer & Solution
Correct answer: B. 4 percent
1. The rate relates the interest earned to the principal.
2. The interest rate is the annual percentage increase on savings.
3. Here the principal is 1,000 dollars.
4. The earned interest in the first year is 40 dollars.
5. Forty dollars on 1,000 dollars is 4 percent.
_Source: OpenStax Principles of Finance (CC BY 4.0), Ch 7 'Time Value of Money I: Single Payment Value'_
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