Question

Suppose that you lent $100 to a friend and he or she paid you back one year later. What was the cost of lending your friend this money ?

Answer 1

The cost of lending your friend the money can be determined by calculating the simple interest that accumulated on the loan over the one-year period.

Step-by-step explanation:

The cost of lending your friend the money can be determined by calculating the simple interest that accumulated on the loan over the one-year period. The formula for simple interest is:

Interest = Principal x Rate x Time

Plugging in the given values, the interest on a $100 loan with a one-year term and no specified interest rate would be $0. However, if there was a specified interest rate, let's say 5%, then the interest would be calculated as:

1. Interest = $100 x 0.05 x 1
2. Interest = $5

Answer 2

The interest rate is the amount of the interest expressed as a percentage of the principal. Thus, if someone lends you $100 and you agree to repay him $110 a year later, the interest rate is 10%, which equals the interest divided by the principal, or ($110-$100)/$100.