Question

UAE Small Business Loan (A). Mohammad tried one last time to explain the loan structure offered by the company’s Emirates bank. His boss just stared at him. Mo explained the detailed calculation of annual interest and principal payments, step-by-step, as detailed by the bank. The loan was for USD5 million, for five years, with an 8.200% interest rate.

Step 1:Calculate simple interest on Loan Principal for one year.
Step 2:Multiply that interest by the number of years of the loan. The bank labeled this "Total Interest."
Step 3:Add the calculated Total Interest to the Loan Principal.
Step 4:Divide this calculated total by the number of years of the loan. This is the annual payment due on the loan (principal and interest).
Step 5:Using the calculated annual payment from Step 4, structure the repayments to make all interest payments (totaling to Total Interest from Step 2) up-front.

Answer 1

The total amount of simple interest from a $5,000 loan after three years at 6% is $900. To find the interest rate that yields $500 in simple interest on a $10,000 loan over five years, we solve the formula to determine that the interest rate is 1%.

Step-by-step explanation:

Understanding Simple Interest Calculations

To answer the student's question about UAE Small Business Loan calculations and simple interest, we must employ simple interest formulas. Simple interest is calculated using the formula:

Interest = Principal × rate × time

For question 6, we calculate the total amount of interest from a $5,000 loan over three years at a simple interest rate of 6% as follows:

Interest = $5,000 × 0.06 × 3 = $900

Therefore, the total simple interest from the $5,000 loan after three years is $900.

For question 7, we find the interest rate for $500 received on a $10,000 loan over five years:

Interest = Principal × rate × time

$500 = $10,000 × rate × 5

Thus, rate = $500 / ($10,000 × 5)

The interest rate charged is found to be 1%.

These calculations are crucial for understanding the cost of borrowing and the returns on lending in terms of simple interest.