Interest Word Problems

Interest Problems are those that usually involve borrowing money, lending money, or investing. Here is a example problem.

• Suppose Karen has $1000 that she invests in an account that pays 4% interest compounded yearly. How much money does Karen have at the end of 5 years to the nearest dollar?

The formula that governs interest situations is 

A is the total accumulated amount

P is called the Principal (the beginning amount of money before any interest is applied)

r is the yearly interest rate

t is the number of years the interest is being applied

Let's take a look at how to use this formula to solve the above problem. 

• Example 1: Karen Invests (from above)

• Example 2: Saving for college
• Suppose you think you’ll need $10,000 in 12 years’ time when your child starts attending university. You want to invest in a mutual fund that yields 3.5% interest annually. How much should you invest to the nearest dollar?

• Example 3: Ted invests. 
• Ted invests $5000 in an account that earns interest and is compounded annually. After 2 years his investment has grown to $5512.50. What was the interest rate on the account?

Now try a few on your own.

• Practice Problem 1:  William wants to have a total of $4000 in two years so that he can put a hot tub on his deck. He finds an account that pays 5% interest compounded yearly. How much to the nearest dollar should William put into this account so that he’ll have $4000 at the end of two years? [here is the solution, don't peak until you've tried it.]

• Practice Problem 2:  Kelly puts her high school graduation money into an account and leaves it there for 4 years while she goes to college. If she receives $750 in graduation money that she puts it into an account that earns 4.25% interest annually. How much will be in Kelly’s account at the end of four years? [here is the solution, don't peak until you've tried it.]

• Practice Problem 3: Kim has $1000 and wants to double her money in 6 years. When she looks for an investment, what interest rate (to the nearest tenth of a percent) does she find in order to make this happen?  [here is the solution, don't peak until you've tried it.]