A small business takes out a one-year loan of $20,000 to purchase new equipment. The loan has an annual interest rate of 5%. Assuming there is no risk of the business failing to repay, what is the total amount the lender will receive at the end of the year?

Components of a Risk-Free Loan Repayment

A lender is considering two different one-year loan proposals, and in both scenarios, the borrower is guaranteed to repay the loan in full.

• Proposal 1: Lend $15,000 at a 5% annual interest rate.
• Proposal 2: Lend $14,000 at a 6% annual interest rate.

To maximize the total amount of money returned at the end of the year, which proposal should the lender accept?

Calculating Original Principal from Total Repayment

Consider a one-year loan where repayment is guaranteed. A lender will always receive a larger total repayment by doubling the interest rate on a loan than by doubling the principal amount of the loan.

Determining the Interest Rate from a Risk-Free Repayment

Evaluating Financial Advice

Evaluating a Financial Claim

A financial analyst is reviewing several one-year loan agreements where repayment is guaranteed. Match each loan agreement (defined by its principal and interest rate) with the correct total repayment amount the lender will receive.

A lender provides a one-year loan of $10,000 where repayment is guaranteed. If the lender increases the annual interest rate from 4% to 5%, by how much will the total repayment amount increase?

Calculating Original Principal from Total Repayment