Question

A friend asks to borrow $48 from you and in return will pay you $51 in one year. If your bank is offering a 6.4%

interest rate on deposits and​ loans:

a. How much would you have in one year if you deposited the $48 instead?

b. How much money could you borrow today if you pay the bank $51 in one​ year?

c. Should you loan the money to your friend or deposit it in the​ bank?

Answer 1

Question a:

Deposit amount = $48

r = interest rate = 6.4%

n = 1 year

Amount in 1 year = Deposit amount * (1+r)^n

= $48 * (1+6.4%)^1

= $51.072

Therefore, amount in 1 year is $51.07

Quesiton b:

Amount to be repaid = $51

r = interest rate = 6.4%

n = 1 year

Amount can be borrowed = Amount to be repaid / (1+r)^n

= $51 / (1+6.4%)^1

= $51 / 1.064

= $47.93

Question c:

Amount if deposited in bank is $51.07

Amount if given to friend is $51

Therefore, it is better to deposit in bank since the future value of deposit is higher than given to friend