Becka borrowed $500 from her cousin at the rate of 9% per year. If the inflation rate was 2.9% that year, what is her cousin's actual rate of return on the loan?
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Becka borrowed $100 from her cousin at the rate of 6% per year. If the inflation rate was 2% that year, what is her cousin's actual rate of return on the loan?
To calculate the actual rate of return on the loan, we need to adjust the interest rate for inflation.
First, let's calculate the inflation-adjusted interest rate.
Inflation-adjusted interest rate = Nominal interest rate - Inflation rate
Given that the nominal interest rate is 9% and the inflation rate is 2.9%, we can calculate the inflation-adjusted interest rate:
Inflation-adjusted interest rate = 9% - 2.9%
Inflation-adjusted interest rate = 6.1%
Therefore, her cousin's actual rate of return on the loan, after accounting for the inflation rate, is 6.1%.
To calculate Becka's cousin's actual rate of return on the loan, we need to consider both the interest rate on the loan and the inflation rate.
Step 1: Calculate the amount of interest Becka needs to pay on the loan.
Since Becka borrowed $500 at an interest rate of 9% per year, the interest she needs to pay annually can be calculated as:
Interest = Principal x Rate = $500 x 9% = $45 per year.
Step 2: Calculate the inflation-adjusted interest rate.
To determine the cousin's actual rate of return, we need to subtract the inflation rate from the interest rate.
Inflation-adjusted interest rate = Interest rate - Inflation rate
= 9% - 2.9% = 6.1%.
Therefore, Becka's cousin's actual rate of return on the loan is 6.1%.