$1000 in an investment and $1000 as a loan

[nosit]

Situation a)

Account pays 12% interest an year nominally, which is compounded on a monthly basis.

Given this circumstances, a $1000 investment will get every month 1%; and after 12 months I will have: 1000*(1+0,01)^12 = $1,126.83

In other words, I got $126.83 of interest
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Situation b)

A loan that charges 12% interest an year nominally, which interest payments occur on a monthly basis.

I calculated a PMT of $88,85

Let's imagine the same $1,000 as a loan:



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Question)

How the second situation can be called as a 12% loan, if the total interest payment for the whole period is $66,19 (even less than 10% of the total loan)?

 

[Dr.Peterson]

How the second situation can be called as a 12% loan, if the total interest payment for the whole period is $66,19 (even less than 10% of the total loan)?

In the first case, interest is paid to you on an increasing balance, so you earn more than 12% of the initial investment.

In the second case, you pay interest on a decreasing balance, so you pay less than 12% of the initial loan.

Make a table of the balance and interest paid each month in the first case, like the table for the second case, and this should be easy to see.