Martin is offered an investment where for $50 000 today, he will receive $53 500 in one year. He decides to borrow $50 000 from the bank to make this investment. What is the maximum interest rate the bank needs to offer on the loan if Martin is at least to break even on this investment?
A)6.8%
B)6.2%
C)7.0%
D)7.6%

Question

Quizplus · Accepted Answer

Martin is borrowing $50 000 and investing it for one year to receive $53 500. 
His net gain from the investment is $53 500 - $50 000 = $3 500. 
For Martin to break even on this investment, he needs to pay back exactly $50 000 + interest to the bank. 
Let the interest rate be x. 
Then, the amount he needs to pay back in one year is $50 000 (1 + x). 
Setting this equal to his net gain: 
$50 000 (1 + x) = $53 500 
Solving for x: 
x = 0.07 or 7%, which is answer choice C. 
Therefore, the bank needs to offer at most 7% interest for Martin to break even on the investment.

Martin Is Offered an Investment Where for $50 000 Today