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.

Calculating Original Principal from Total Repayment

Lender's Expected Payoff from a Risky Loan