Suppose Compu-Global-Hyper-Mega-Net borrows $100,000 from Mel's Savings and Loan for one year at a 10% interest rate. At the end of the year; the owner, Mr. Simpson, has to repay $110,000. Of the course of that same year, the average level of prices increases by 10%. What is the real interest rate of the loan?

Question

Rylie Huber

Business

6 November, 13:14

Suppose Compu-Global-Hyper-Mega-Net borrows $100,000 from Mel's Savings and Loan for one year at a 10% interest rate. At the end of the year; the owner, Mr. Simpson, has to repay $110,000. Of the course of that same year, the average level of prices increases by 10%. What is the real interest rate of the loan?

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Answers (1)

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Krista · Answer 1

The real interest rate of the loan is 0%

Explanation:

1. Let's review the information given to us to answer the question correctly:

Amount of the loan received by Compu-Global-Hyper-Mega-Net = US$ 100,000

Interest rate of the loan = 10% annually

2. Of the course of that same year, the average level of prices increases by 10%. What is the real interest rate of the loan?

Let's use the formula of the real interest rate:

Real interest rate = Standard interest rate - Inflation or Increase on prices

Real interest rate = 10 - 10

Real interest rate = 0%