Certain GRE percent problems require a working knowledge of basic interest formulas. The compound interest formula may look complicated, but it just expresses the idea of “successive percents” for a number of periods.
Especially for compound interest questions, be prepared to use the GRE on-screen calculator to help with the math involved!
| Formula | Example | |
| Simple Interest | Principal (P) × Rate (r) × Time (t) |
$5,000 invested for 6 months at an annual rate of 7% will earn $175 in simple interest. Principal = $5,000, Rate = 7% or 0.07, Time = 6 months or 0.5 years. Prt = $5,000(0.07)(0.5) = $175 |
| Compound Interest |
whereP = principal, r = rate (decimal) n = number of times per year t = number of years |
$5,000 invested for 1 year at a rate of 8% compounded quarterly will earn approximately $412:
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Assume an auto loan in the amount of $12,000 is made. The loan carries an interest charge of 14%. What is the amount of interest owed in the first three years of the loan, assuming there are no payments on the loan, and there is no compounding?
For the same loan, what is the loan balance after 3 years assuming no payments on the loan, and annual compounding?
For the same loan, what is the loan balance after 3 years assuming no payments, and quarterly compounding? (Note: The exponent here is higher than you’d likely encounter on the GRE.)