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Answer to Question #6018 in Economics of Enterprise for LaMarcus Streeter

Question #6018
A $50,000 loan is to be amortized over 7 years, with annual end-of-year payments. Which of these statements is CORRECT?

a. The annual payments would be larger if the interest rate were lower.
b. If the loan were amortized over 10 years rather than 7 years, and if the interest rate were the same in either case, the first payment would include more dollars of interest under the 7-year amortization plan.
c. The proportion of each payment that represents interest as opposed to repayment of principal would be lower if the interest rate were lower.
d. The last payment would have a higher proportion of interest than the first payment.
e. The proportion of interest versus principal repayment would be the same for each of the 7 payments.
Expert's answer
c. The proportion of each payment that represents interest as opposed to repayment of principal would be lower if the interest rate were lower.
The lower is the interest rate, the lower is its proportion in payment.

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