Question

A broadband service company borrowed $2 million for new equipment and repaid the loan in amounts of $202,000 in years 1 and 2 plus a lump sum amount of $1.95 million at the end of year 3. What was the interest rate on the loan? The rate of interest on the loan was______________.

Answer 1

Answer:

The interest paid on the $2 million loan borrowed by a broadband service company is $354,000 while the interest rate on the loan is 17.70%.

Explanation:

In finance, interest is the amount that a bank or financial institution charged a borrower for borrowing money from them or the amount paid the customers for making use of their deposit.

Answer 1: Calculation of interest

The interest amount can be obtained as the difference between the amount lent or borrowed and the total amount repaid.

From the question therefore, the interest amount can be calculated as follows:

Amount borrowed = $2 million = $2,000,000

Total amount repaid is the addition of all repayments made, i.e. $202,000 in years 1 and 2 plus a lump sum amount of $1.95 million at the end of year 3. This calculation is given as follows:

Total amount repaid = $202,000 + $202,000 + $1,950,000

                                  = $2,354,000  

Amount borrowed = $2 million = $2,000,000

Interest = Total amount repaid - Amount borrowed

             = $2,354,000 - $354,000

             = $354,000

Answer 2: Calculation of interest rate

When the interest amount is quoted as a percentage of the amount loaned to a borrower or as percentage of the used deposited money in the account of a customer, it is called an interest rate.  

Given the interest amount calculated in Answer (1) above, the interest rate can be calculated as follows:

Interest rate = (Interest ÷ Amount borrowed) × 100

                    = ($354,000 ÷ $2,000,000) × 100

                    = 0.1770  × 100

                    = 17.70%

Therefore, the interest paid on the $2 million loan borrowed by a broadband service company is $354,000 while the interest rate on the loan is 17.70%.

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