The annual interest would be $5 if you have loaned a friend $100 and will charge him 5% annually and the total amount would be $105.
It is defined as the interest based on the principal amount, it does not include the compounded amount. The interest calculates on the initial amount of borrowed amount.
We have:
You have loaned a friend $100 and will charge him 5% annually.
As we know:
A = P(1 + rt)
P = $100
r = 5% = 0.05
t = 1 years
A = 100(1 + 0.05×1)
A = $105
I = A - P = 105 - 100 = $5
Thus, the annual interest would be $5 if you have loaned a friend $100 and will charge him 5% annually and the total amount would be $105.
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