Mark wants to borrow money to buy a car. His bank offers him a loan of £5,000 to be payed back over 3 years at 4% compound interest. a) Work out the interest acquired in the 2nd year. b) In total how much will Mark end up paying back the bank?

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In questions concerning compound interest, interest is added to principle sum at the end of each year. Therefore, the interest increases each year as you are paying interest on interest

a) To work out the interest owed in the second year we need to find 4% of the principle sum plus the first years interest:

In the first year of Mark's loan the interest is 4/100 x £5,000 = 200

Therefore to work out the interest acquired on the loan in the second year:

4/100 x £5,200 = £208

b) The final total owed will be a sum of the total borrowed (£5,000) plus the three years interest. 

We have worked out the first two years interest in part a. The interest in the third year is worked out as follows:

4/100 x £5,408 = £216.32

Therefore the total amount to be payed back to the bank is:

£5,000 + £200 + £208 + £216.32 = £5,624.32

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