Question

A friend has $950 that has been saved from her part-time job. She will need her money, plus any interest earned on it, in six months and has asked for your help in deciding whether to put the money in a bank savings account at 5% interest or to lend it to Simone. Simone has promised to repay $969 after six months.

Calculate the rate of return if the money is lent to Simone. (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Rate of return on annual basis:_____%

Answer 1

Saving (P) = $950

Rate (r) = 5% = 0.05

Time (n) = 6 month = 6/12 year = 1/2 year

Interest = P×r×n = 950×0.05×1/2 = $23.75

Amount at the end of six month = Saving + Interest = 950+23.75 = $973.75

Simon promised to pay $969 after six month, which is less than the amount received from the bank savings account. Therefore, it is better to put the money in bank saving account.

Amount received from Simon after six months = $969

Interest charged from Simon = 969-950 = $19

Rate of interest charged from Simon = Interest charged ÷ Saving × 1/n × 100 = 19÷969 = 19÷950×2/1×100 = 4%

Rate of return on annual basis = 4%