A $50,000 Loan Is to Be Amortized Over 7 Years

question 92

Multiple Choice

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.

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Definitions:

Ledger

A comprehensive collection of all accounts used by an organization, showing the changes made to each account due to transactions, and the current balance.

Journal

An accounting record where all transactions are initially recorded using the double-entry bookkeeping system before they are transferred to accounts in the general ledger.

Debt Ratio

A financial ratio that measures the extent of a company’s leverage, calculated by dividing total liabilities by total assets.

Liabilities

Financial obligations a company owes to external parties, including loans, accounts payable, and mortgages.