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  • Definition of Rate of Return

  • Distinction Between Rate of Return and Interest Rate

Formula for Rate of Return on a Loan

The rate of return on a loan measures its profitability by comparing the net gain to the original amount loaned. It is calculated by subtracting the loan principal from the total amount the borrower actually repays, and then dividing by the principal. The primary formula is: rate of return=actual repayment−loan principalloan principal\text{rate of return} = \frac{\text{actual repayment} - \text{loan principal}}{\text{loan principal}}. This equation can be algebraically rearranged to express the relationship in terms of the gross return factor (1 + rate of return), which is equal to the ratio of the total repayment to the original loan amount: $1 + \text{rate of return}=\frac{\text{total amount borrower pays back}}{\text{loan}}$.

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  • Formula for Rate of Return on a Loan

  • General Formula for Rate of Return on Any Asset or Investment

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  • Analyzing Investment Scenarios

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  • Evaluating an Unprofitable Investment

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  • Investment Scenario Analysis

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  • Distinguishing Investment Earnings

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  • An investment advisor makes the following two statements to a client:

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    Based on the conceptual distinction between an interest rate and a rate of return, which of the following is the best evaluation of the advisor's statements?

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Learn After

  • Rate of Return and Loss in a Total Default Scenario

  • Dependence of Lender's Revenue on Rate of Return

  • Discrepancy Between Expected Rate of Return and Nominal Interest Rate Due to Default Risk

  • Relationship Between Rate of Return, Interest Rate, and Default Risk

  • Loan Rate of Return as a Specific Case of a General Investment Return Formula

  • A financial institution provides a loan of $20,000 to a client. At the end of the loan term, the client has paid back a total of $21,500. What was the financial institution's rate of return on this loan?

  • Comparing Loan Profitability

  • Calculating Required Loan Repayment

  • Evaluating Loan Profitability

  • A lender issues several loans, each with a principal of $10,000. Match each repayment scenario with the lender's resulting rate of return.

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  • A financial firm issues two different loans, Loan X and Loan Y, for the exact same principal amount. After one year, the total amount repaid for Loan X is greater than the total amount repaid for Loan Y. Based solely on this information, what can be concluded about the rates of return for the two loans?

  • A bank manager is reviewing a loan file to determine its profitability. The file shows that the borrower made a total repayment of $55,000. To accurately calculate the lender's rate of return on this loan, which single piece of information is essential?

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  • An investor provides a loan to a startup. At the end of the loan term, the total amount repaid by the startup is exactly 40% greater than the original amount of the loan. What is the investor's rate of return on this loan?