Bobby took out a commercial mortgage to pay for his new podcast studio. It is an interest-only loan of $800,000 with an interest rate of 4.5%. How much will Bobby pay in interest over the year?

Rationale

Bobby will pay $36,000 in interest over the year.

To find the annual interest on an interest-only loan, multiply the loan amount by the interest rate. In this case, Bobby's loan of $800,000 incurs 4.5% interest, resulting in a total interest payment of $36,000 for the year.

A ($10,500) YOUR ANSWER

This amount is incorrectly calculated as it does not reflect the interest rate applied to the full loan amount. To arrive at this figure, one would need to miscalculate the percentage of the loan, leading to a gross underestimation of the actual interest owed.

B ($36,000) CORRECT

This option accurately represents the annual interest payment. By applying the formula $\text{Interest} = \text{Principal} \times \text{Rate}$, we find $800,000 \times 0.045 = 36,000$, which confirms this as the correct answer.

C ($45,000) YOUR ANSWER

This figure is derived by mistakenly applying a higher interest rate or miscalculating the principal amount. It suggests a misunderstanding of the calculation, as it exceeds the correct interest derived from the 4.5% rate on the $800,000 loan.

D ($3,500) YOUR ANSWER

This amount is vastly underestimated and may result from an incorrect application of either the interest rate or the principal amount over an unrealistic time frame. It does not align with the standard interest calculation for a loan of this size at the stated rate.

Conclusion

Bobby's interest-only loan of $800,000 at 4.5% results in an annual interest payment of $36,000, calculated using the formula for simple interest. The other options reflect various miscalculations or misunderstandings of how to apply the interest rate to the principal amount, leading to incorrect figures. Understanding how to calculate interest accurately is crucial in financial planning and budgeting.

Bobby took out a commercial mortgage to pay for his new podcast studio. It is an interest-only loan of $800,000 with an interest rate of 4.5%. How much will Bobby pay in interest over the year?

Bobby will pay $36,000 in interest over the year.

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