Question

a $250,000 loan is to be amortized over 8 years, with annual end-of-year payments. which of these statements is correct

Answer 1

The correct option in this case is:

d) The proportion of each payment that represents interest as opposed to repayment of principal would be lower if the interest rate were lower.

What is loan amortization?

Loan amortization means that loan principal would be repaid gradually alongside interest over the 8 years period rather than an interest only loan where the principal is repaid at the end of loan period.

In this case, the portion of annual payment that is in respect of interest would be much lower when the interest rate on the loan is lower rather than when the interest rate is higher.

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Full question:

A $250,000 loan is to be amortized over 8 years, with annual end-of-year payments. Which of the following statements is CORRECT?

a) The proportion of interest versus principal repayment would be the same for each of the 8 payments.

b) The annual payments would be larger if the interest rate were lower.

c) If the loan were amortized over 10 years rather than 8 years, and if the interest rate were the same in either case, the first payment would include more dollars of interest under the 8-year amortization plan.

d) The proportion of each payment that represents interest as opposed to repayment of principal would be lower if the interest rate were lower.

e) The last payment would have a higher proportion of interest than the first payment