Here are the essential concepts you must grasp in order to answer the question correctly.
Simple Interest Formula
The simple interest formula is used to calculate the interest earned on an investment over time. It is expressed as I = PRT, where I is the interest, P is the principal amount (initial investment), R is the rate of interest (as a decimal), and T is the time in years. This formula allows for straightforward calculations of interest without compounding.
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Principal Amount
The principal amount refers to the initial sum of money that is invested or loaned. In this context, it is the $500 that the person invests. Understanding the principal is crucial because it serves as the base amount upon which interest is calculated, directly affecting the total interest earned over time.
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Interest Rate
The interest rate is the percentage at which interest is calculated on the principal amount. In this problem, the interest rate is 2%, which means that for every dollar invested, 2 cents will be earned as interest each year. This rate is essential for determining how much interest accumulates over the specified time period.
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