A loan has an outstanding principal balance of $240,000 and a 6% annual interest rate. Using simple monthly accrual, how much interest accrues for one month?
Correct Answer
B) $1,200
Why this is correct: For simple monthly interest accrual, you take the annual interest rate, convert it to a monthly rate by dividing by 12, and apply it to the principal balance. Calculation: Principal ($240,000) × Annual Rate (6% or 0.06) ÷ 12 months = $240,000 × 0.06 ÷ 12 = $240,000 × 0.005 = $1,200. Why the other choices are wrong: "$600" is wrong; this would result from using a 3% annual rate or dividing by 24 instead of 12. "$1,440" is wrong; this is 6% of $24,000, a common misplacement of the decimal. "$14,400" is wrong; this is the annual interest ($240,000 × 0.06), not the monthly amount. Exam tip: Monthly interest = (Loan Balance × Annual Interest Rate) ÷ 12. Always double-check your decimal placement.
Why This Is the Correct Answer
Why this is correct: For simple monthly interest accrual, you take the annual interest rate, convert it to a monthly rate by dividing by 12, and apply it to the principal balance. Calculation: Principal ($240,000) × Annual Rate (6% or 0.06) ÷ 12 months = $240,000 × 0.06 ÷ 12 = $240,000 × 0.005 = $1,200. Why the other choices are wrong: "$600" is wrong; this would result from using a 3% annual rate or dividing by 24 instead of 12. "$1,440" is wrong; this is 6% of $24,000, a common misplacement of the decimal. "$14,400" is wrong; this is the annual interest ($240,000 × 0.06), not the monthly amount. Exam tip: Monthly interest = (Loan Balance × Annual Interest Rate) ÷ 12. Always double-check your decimal placement.
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