Chapter 10, Problem 1CR

The price or rental fee charged by a lender to a borrower for the use of money is known as _________. (10-1)

To determine

To fill: The blank given in the statement “The price or rental fee charged by a lender to a borrower for the use of money is known as __________.”

Answer to Problem 1CR

The price or rental fee charged by a lender to a borrower for the use of money is known as interest.

Explanation of Solution

Interest refers to the amount paid by the borrower of the funds to the lender. Interest is paid by the borrower regularly over the period of time above the principal repayment. In this, person use another person’s money in its business and pay interest on the same amount.

The formula to compute the interest is $\text{Interest}=\text{Principal}\times \text{Rate}\times \text{Time}$.

Consider an example:

The principal amount of loan is $\$5,000$, the rate of interest is $8\%$ and the time period is $2$ years.

Compute the interest by substituting $\$5,000$ for principal, $0.08$ for the rate of interest and $2$ for time in the formula, $\text{Interest}=\text{Principal}\times \text{Rate}\times \text{Time}$.

$\begin{array}{c}\text{Interest}=\text{Principal}\times \text{Rate}\times \text{Time}\\ =\text{5,000}\times \text{0}\text{.08}\times \text{2}\\ =\text{\$800}\end{array}$

So, the amount of interest is $\$800$.

Hence, the complete statement is, “The price or rental fee charged by a lender to a borrower for the use of money is known as interest.”