Making Extra Payments on a Loan

question 92

Multiple Choice

Making extra payments on a loan

• A)reduces the total interest paid.
• B)frees up cash flow for other expenses.
• C)lengthens the maturity of the loan.
• D)reduces the size of future payments.

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Definitions:

Compounded Annually

A method of calculating interest where the interest is added to the principal sum each year, thus each subsequent interest calculation is made on an increased principal.

Present Value

The current value of a future amount of money or stream of cash flows given a specified rate of return.

Future Value

The amount of money an investment is expected to be worth in the future, considering interest or capital gains.

Interest Rate

The amount charged by a lender to a borrower for the use of assets, expressed as a percentage of the principal.