A $10,000 Loan Is to Be Amortized Over 5 Years,with

question 14

Multiple Choice

A $10,000 loan is to be amortized over 5 years,with annual end-of-year payments.Given the following facts,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 5 years,and if the interest rate were the same in either case,the first payment would include more dollars of interest under the 5-year amortization plan.
• C) The last payment would have a higher proportion of interest than the first payment.
• D) The proportion of interest versus principal repayment would be the same for each of the 5 payments.
• E) The proportion of each payment that represents interest as opposed to repayment of principal would be higher if the interest rate were higher.

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Definitions:

Cash Dividend

A payment made by a company out of its profits to shareholders in the form of cash.

Indirect Method

A way of calculating cash flows from operating activities in the statement of cash flows, where net income is adjusted for changes in balance sheet items that affect cash.

Depreciation Expense

Depreciation expense is the allocated amount of the cost of a tangible or physical asset that is expensed over its useful life, reflecting wear and tear or obsolescence.

Gain On Sale

The profit realized when an asset is sold for more than its book value.