On January 1 of last year, Bank of America loaned $10,000 to Luis and charged him a fixed annual interest rate of 2%. On January 1 of this year, Luis repaid this loan with interest, for a total repayment of $10,200. Luis was not late one time during the 12-month repayment period. On January 1 of last year, the price level was 100, and on January 1 of this year, the price level was 105. Which of the answer choices best describes the purchasing power of Bank of America concerning its loan to Luis?

 

Bank of America lost purchasing power because the real return on the loan was negative.

 

Bank of America lost purchasing power because the growth rate of prices was less than the fixed annual interest rate of the loan.

 

Bank of America gained purchasing power because it earned $200 in interest from the loan.

 

Bank of America gained purchasing power because Luis was not late one time during his 12-month repayment period.

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