Integrate relevant sources to support assertions, correctly formatting citations and references using APA style. 2022 latest answers
Did you use 3–5 sources?
Are they cited in APA format throughout the plan?
Have you included an attached reference list?
Answers to Activity 4.3
1 Charging 5% on £10,000 at the end of the year would mean an
interest charge of £500 (0.05×£10,000).
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.
2 If prices have risen by 63% over the last ten years, the real value of
the interest payments today is lower. One way of thinking about
this is that ten years ago, Mark had to give up £1000 of goods and
services in order to pay the interest on this loan, which was 5% of
his pay (£1000/£20,000). Today, he has to give up fewer goods
and services in order to pay the interest: only 3% of his pay
3 You can use the simplifified formula in Section 5.2 of this chapter to
work out that the annual interest rate is 10% − 5% = 5% a year.
Interest is adding 10% a year to the cost of the loan, but in real
terms, inflflation is reducing the cost by 5% a year.