Question

Personal finance loans, such as home loans, can be split into two broad categories: 1. Interest-only (debt repayment is interested only) 2. Amortizing loans. (debt repayment is both interest and principal) Amortizing loans typically involved fixed repayments that can be valued with the ordinary annuity formula. Which of the following statements about the payments of a long-term amortized loan is true? Select one or more:
a. At the end of the loan, principal = interest

b. At the start of the loan, principal < interest

c. At the end of the loan, most of the payment is principal

d. At the start of the loan, most of the payment is principal

Answer 1

Solution :-

The Correct Answer is ( C )

As in case of Amortized loan , A fixed Installments is to be paid at every specific period . Now As initially the Value of Loan is high so in the Installment Payment the Amount of interest is high therefore little share of Principal is to be repaid  .But Now as long as the Payments made , Along with the interest Some Principal is to be repaid , Then the Value of loan gets reduced so the interest charged on it also gets reduced , Now as the Interest reduced the share of the principal in the installment increase .