How much will an individual owe at the end of a 2-year loan of $1000 at a 5% compound interest rate?

To determine the total amount owed at the end of a 2-year loan with a principal of $1,000 and a 5% compound interest rate, it is essential to use the formula for compound interest:

Total Amount = Principal × (1 + r)^n

Where:

• Principal is the initial amount of the loan ($1,000).
• r is the annual interest rate (5% or 0.05).
• n is the number of years the money is borrowed (2 years).

Substituting the values into the formula gives:

Total Amount = 1,000 × (1 + 0.05)^2 Total Amount = 1,000 × (1.05)^2 Total Amount = 1,000 × 1.1025 Total Amount = 1,102.50

Therefore, at the end of the 2-year loan, the individual will owe $1,102.50. This calculation illustrates how compound interest works, as interest is calculated on both the initial principal and the interest that accumulates in the previous periods. Thus, this reflects the nature of compound interest in which earnings or costs grow over time, leading to a total that is greater than simply adding the interest