What is a Simple Loan?

a. What is a Simple Loan?

A simple loan is a type of loan where the borrower receives a fixed amount of money (the principal) and is required to pay back that amount along with interest over a specified period. The interest on a simple loan is typically calculated based only on the principal amount for the entire duration of the loan. This means that the borrower does not face compound interest, where interest is calculated on both the initial principal and the accumulated interest from previous periods.

Key Characteristics of a Simple Loan:

• Fixed Principal: The amount borrowed remains constant throughout the loan term.
• Fixed Interest Rate: The interest rate agreed upon at the start of the loan does not change over time.
• Interest Calculation: Interest is calculated solely on the original principal, not on any accumulated interest.
• Repayment Terms: The loan is repaid in full at maturity or through regular installments, depending on the agreement.

b. Yield to Maturity on Ahmed's Loan

To calculate the yield to maturity (YTM) on Ahmed's loan, we need to determine the return he needs to pay back to his father. The YTM represents the annualized rate of return on the loan if held until maturity.

Given Data:

• Principal (Amount Borrowed): 100 SAR
• Amount to be Repaid Next Year: 110 SAR
• Time Period: 1 year

Formula for Yield to Maturity (YTM):

The formula to calculate YTM for a simple loan is as follows: YTM=(Amount Repaid−Principal)Principal×100YTM = \frac{(Amount\ Repaid - Principal)}{Principal} \times 100

Calculation:

Plugging in the values: YTM=(110 SAR−100 SAR)100 SAR×100YTM = \frac{(110\ SAR - 100\ SAR)}{100\ SAR} \times 100 YTM=10 SAR100 SAR×100YTM = \frac{10\ SAR}{100\ SAR} \times 100 YTM=0.1×100YTM = 0.1 \times 100 YTM=10%YTM = 10\%

Conclusion:

The yield to maturity on Ahmed's loan is 10%. This means that Ahmed is effectively paying an annual return of 10% on the borrowed amount.

Sample Answer