Answer:
When your friend asks for a loan of $1000, there are several options for determining the repayment terms. Let's go through each option:
a) Compound interest: With compound interest, the interest is calculated based on the initial loan amount as well as any accumulated interest. The interest is added to the principal amount, and future interest calculations are based on the new total. This means that the interest can grow over time. The specific interest rate and compounding period (e.g., annually, quarterly, monthly) would need to be agreed upon.
b) Simple interest: Simple interest is calculated based only on the initial loan amount. The interest is calculated using a fixed percentage of the principal. Unlike compound interest, there is no compounding or accumulation of interest over time. The specific interest rate and the duration of the loan would need to be agreed upon.
c) Variable interest: Variable interest means that the interest rate can change over the duration of the loan. This can be based on a benchmark interest rate, such as the prime rate or the market rate, plus an additional margin determined by the lender. The specific terms of the variable interest rate, including any rate adjustments and frequency of adjustments, would need to be agreed upon.
d) Prime interest: Prime interest refers to an interest rate that is tied to the prime rate, which is the rate at which banks lend to their most creditworthy customers. The prime rate is generally used as a benchmark for setting interest rates on loans. If your friend offers to pay back at the prime interest rate, it means that the interest rate on the loan would be based on the current prime rate at the time of borrowing. The specific terms and adjustments, if any, would need to be agreed upon.
