If the interest earned on $1,000 in one year is $20, what is the annual interest rate?

• A. 0.5%
• B. 1%
• C. 3%
• D. 2%

Answer: (D)

When the time is one year, the interest rate is found by dividing the interest earned by the principal: Rate = Interest / Principal. Here, 20 dollars earned on 1000 dollars gives 20 / 1000 = 0.02, which is 2% per year. So the annual interest rate is 2%.

To see why the other options don’t fit: 0.5% of 1000 would be 5 dollars, 1% would be 10 dollars, and 3% would be 30 dollars. None of those match the 20 dollars earned, so the correct rate is 2%.