Sam Is Comparing the Costs of Two Loans

question 2

Multiple Choice

Sam is comparing the costs of two loans.One is due in one year and the other is due in four years.Both have the same stated rate of interest.Which of the following is true?

• A) The principal paid for the one-year loan will be lower than the principal paid for the four-year loan.
• B) The principal paid for the one-year loan will be higher than the principal paid for the four-year loan.
• C) The interest paid for the one-year loan will be lower than the interest paid for the four-year loan.
• D) The interest paid for the one-year loan will be higher than the interest paid for the four-year loan.
• E) The interest and principal payments cannot be compared for the two loans.

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Definitions:

Economic Conditions

The state of a country's economy at a given time, influenced by factors such as GDP, unemployment rates, and inflation.

Liquidity

A company’s ability to convert assets into cash.

Straight-Line Depreciation

A method of calculating the depreciation of an asset which spreads the cost evenly over its estimated useful life.

Useful Life

An estimate of the duration over which an asset is expected to be economically viable and operational in a business.