Suppose that you lent $100 to a friend and he or she paid you back one year later. what was the cost of lending your friend this money ?

The interest rate is the amount of the interest expressed as a percentage of the principal. Thus, if someone lends you $100 and you agree to repay him $110 a year later, the interest rate is 10%, which equals the interest divided by the principal, or ($110-$100)/$100.

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