question archive Imagine that your friend lends you $100 and that the loan is repayable in one year
Imagine that your friend lends you $100 and that the loan is repayable in one year
Subject:EconomicsPrice:2.87 Bought7
Imagine that your friend lends you $100 and that the loan is repayable in one year.
a. If you are to pay her $108 in one year's time, determine the principal, interest payment, and the nominal interest rate.
b. If you are to pay 10% nominal interest on this loan, how much do you have to pay her at maturity? In the case of part
c. if the inflation rate is 6% per year, how much is the real interest rate?
d. If the inflation rate is higher than that of in part (c), who is benefiting and who is losing in terms of purchasing power?
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Answer:
a. Ans: Principal = $100 , interest =$8 and interest rate = 8% per year.
b . Ans: $110
Explanation:
Future or maturity value = P ( 1 + i )N
= $100 ( 1 + 0.10 )1
= $100 ( 1.10)1
= $100 * 1.1 = $110
c . Ans: Real interest rate = 4%
Explanation:
Real interest rate = Nominal interest rate - Inflation rate
= 10% - 6% = 4%
d. Ans: If the inflation rate is higher than that of in part ( c) , the borrower is benefiting and the lender is losing in terms of purchasing power.
Explanation:
Here , You are the borrower and your friend is the lender. During inflation , the value of money decreases in terms purchasing power.
