Calculate the annual return earned by a lender on a sum of $800 lent out at 8 percent interest, if prices inflate at the rate of 5 percent per annum.
A)$909.03
B)$808.50
C)$800.67
D)$907.20

Question

Quizplus · Accepted Answer

First, calculate the interest earned on the loan: 
Interest = 800 x 0.08 = $64

Then, calculate the amount of inflation on the loan: 
Inflation = 800 x 0.05 = $40

The real return earned by the lender is: 
Real return = 64 - 40 = $24

To calculate the annual return in percentage, divide the real return by the initial loan amount and multiply by 100: 
Annual return = (24/800) x 100 = 3%

Finally, multiply the annual return by the initial loan amount: 
Total return = 800 x 0.03 = $24

Therefore, the lender earns $907.20 annually on the loan. The answer is D.

Calculate the Annual Return Earned by a Lender on a Sum