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Tactics for the GRE
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1: Table of Contents
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2: Vocabulary Tips for the GRE
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3: Rates and Distances
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4: Lie vs. Lay
Math
Word Problems for the GRE
Sample
1: Table of Contents
Sample
2: Interest on Financial Products
Sample
3: Sample Problems with Statistics
Sample
4: Problems with All Variables
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Review for the GRE
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Section: Verbal 9
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Section: Answer Key for Verbal 9
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Two Sample Problems:
Interest on Financial Investments
In the world of finance,
the amount of money that a person invests is called principal, while the
money that a bank pays the person for investing it is called interest.
The rate (or interest rate) is the percentage used to compute the amount
of interest that a bank pays on any given deposit.
By definition: Interest
= Principal x Rate x Time (or I = PRT)
Unless otherwise specified,
the interest is simple interest per year (no compounding).
On the GRE, interest problems can be relatively straightforward. You will
be given three of the four quantities (interest, principal, rate, time)
for a given scenario and asked to calculate the fourth quantity. Most
of the time, however, the test writers will throw a predictable curve
ball to test your understanding of these basic concepts - and the relationship
among them. Here are the most common examples:
Example 1: Using the Basic Rate Equation
Frank puts $5,000
into a college savings account that pays 4.25% simple annual interest.
If he leaves the money in the account for 3.5 years, what is the total
amount that Frank will have in his college savings account?
| a. |
$5,014.88 |
| b. |
$5,063.75 |
| c. |
$5,743.75 |
| d. |
$7,437.50 |
| e. |
$7,543.75 |
Solution: Interest
= Principal x Rate x Time. In this case, we have simple annual interest
and we are asked to calculate the total amount at the end of 3.5 years:
Total = $5,000 + ($5,000)(0.0425)(3.5) = $5,000 + $743.75 = $5,743.75
Choice C is correct.
Example 2: Two
Different Investments
Samantha deposited a total of $25,000 in a bank CD and a money market
account. The bank CD offers a 7.5% annual return, while the money market
account offers a 5.25% annual return. If Samantha earns $400 more per
year from the CD than the money market account, how much did she invest
in the CD?
| a. |
$10,569 |
| b. |
$11,011 |
| c. |
$11,569 |
| d. |
$13,431 |
| e. |
$13,989 |
Solution: Here,
we are asked to calculate how much of the $25,000 Samantha placed into
one of two investments. Let x = the amount in the bank CD and 25000 -
x = the amount in the money market.
In this case, we know the interest rates on the two products and the difference
between them. So, we can use this information to set up an equation to
solve for the initial amount of money invested. The trick is to include
the additional $400 in earnings on the correct side of the equation (since
the CD earns her $400 more, we must add it to the OTHER side of the equation
to make the quantities equal).
Principal x Rate x Time of CD = Principal x Rate x Time of Money Market
x(0.075)(1) = (25000 - x)(0.0525)(1) + 400
0.075x = 1312.5 - 0.0525x + 400
0.1275x = 1712.5
x =$13,431.37 in the CD. Choice D is correct.
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