What is the first year interest amount for a $138,000 loan at 5% compounding annually over 3 years?

What is the first year interest amount for a $138,000 loan at 5% compounding annually over 3 years?

• A. $6,900.00
• B. $8,290.00
• C. $6,100.00
• D. $7,200.00

Answer: (A)

To determine the first-year interest amount on a loan, you simply need to calculate 5% of the initial principal amount, which is $138,000 in this case. Calculating 5% of $138,000 involves multiplying the principal by the interest rate: First-year interest = Principal × Interest Rate First-year interest = $138,000 × 0.05 First-year interest = $6,900 This indicates that in the first year, you would accrue $6,900 in interest on the loan. The focus on simple interest for the first year (rather than considering compound interest) is key because compounding applies to subsequent years rather than the immediate calculation for the first. Thus, the calculated first-year interest amount aligns with the answer provided, confirming that this option reflects the correct approach and answer to the question.

To determine the first-year interest amount on a loan, you simply need to calculate 5% of the initial principal amount, which is $138,000 in this case.

Calculating 5% of $138,000 involves multiplying the principal by the interest rate:

First-year interest = Principal × Interest Rate

First-year interest = $138,000 × 0.05

First-year interest = $6,900

This indicates that in the first year, you would accrue $6,900 in interest on the loan. The focus on simple interest for the first year (rather than considering compound interest) is key because compounding applies to subsequent years rather than the immediate calculation for the first.

Thus, the calculated first-year interest amount aligns with the answer provided, confirming that this option reflects the correct approach and answer to the question.