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• 1 Charging 5% on £10,000 at the end of the year would mean an

• interest charge of £500 (0.05×£10,000).  2022 latest answers

• 2 Although the same initial sum of £10,000 is borrowed, total interest

• on the reducing-balance loan is lower (£266.79) than interest on the

• loan in Question 1 (£500). This is because, in Question 1, £10,000

• is borrowed for the full year: in other words, the average amount

• owed during the year is always £10,000. By contrast, with the

• reducing-balance loan, part of the principal is being paid back each

• month. This means only £852.09 of the loan (the amount

• outstanding at the start of month 12) is borrowed for the whole

• year: £1700.73 of the loan is borrowed for 11 months; £2545.93

• for 10 months, and so on. The full £10,000 is borrowed only for

• one month. Taking the year as a whole, the average amount owed is

• around £5400 (the amount outstanding halfway through the year,

• between months 6 and 7). Since the average sum borrowed is lower,

• the total interest charged is also lower.

• Answers to Activity 4.5

• 1 Mark pays 10% × £10,000 = £1000 interest each year. This is a

• nominal value – it’s the cash sum he pays each year.