1. 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.
c. The proportion of each payment that represents interest as opposed to repayment of principal would be lower if the interest rate were lower.
In finance, a loan is a debt evidenced by a note which specifies, among other things, the principal amount, interest rate, and date of repayment. A loan entails the reallocation of the subject asset(s) for a period of time, between the lender and the borrower. In a loan, the borrower initially receives or borrows an amount of money, called the principal, from the lender, and is obligated to pay back or repay an equal amount of money to the lender at a later time. Typically, the money is paid back in regular installments, or partial repayments; in an annuity, each installment is the same amount. The higher is the interest rate, the higher are the payments.