GMAT Exam > GMAT Videos > Quantitative for GMAT > Problem Set 2 : Simple Interest
Problem Set 2 : Simple Interest Video Lecture | Quantitative for GMAT
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FAQs on Problem Set 2 : Simple Interest Video Lecture - Quantitative for GMAT
| 1. What is simple interest? |  |
Ans. Simple interest is a method of calculating the cost of borrowing or earning money. It is calculated as a percentage of the principal amount and is based on a fixed interest rate over a specific period of time. The formula for calculating simple interest is: I = P * R * T, where I is the interest, P is the principal amount, R is the interest rate, and T is the time in years.
| 2. How is simple interest different from compound interest? | |
Ans. Simple interest and compound interest differ in how they calculate interest over time. Simple interest only applies to the principal amount, whereas compound interest applies to both the principal and any accumulated interest. In simple interest, the interest remains constant throughout the duration, while in compound interest, the interest is added to the principal at regular intervals and then earns interest itself. As a result, compound interest tends to yield higher returns over time compared to simple interest.
| 3. Can you provide an example of calculating simple interest? | |
Ans. Sure! Let's say you borrow $1,000 at an annual interest rate of 5% for a period of 2 years. To calculate the simple interest, you can use the formula I = P * R * T. Plugging in the values, we get I = 1000 * 0.05 * 2 = $100. Therefore, the simple interest on the loan would be $100.
| 4. How is the interest rate determined for simple interest? | |
Ans. The interest rate for simple interest is determined by various factors, including the risk associated with lending or investing, market conditions, and the specific terms of the loan or investment. Lenders or investors may consider factors such as creditworthiness, inflation rates, and the overall economic environment when setting the interest rate. It is important to shop around and compare interest rates offered by different institutions to ensure you are getting the best deal.
| 5. Can simple interest be negative? | |
Ans. No, simple interest cannot be negative. Simple interest is always a positive value since it represents the cost of borrowing or the earnings from investing money. If the interest rate is negative, it would result in a decrease in the principal amount over time, which is not applicable to simple interest calculations.
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Dec 22, 2024 Last updated |
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