In a fully amortising loan with equal periodic instalments, what normally happens to the interest portion of each instalment over time?
Correct answer: C. It decreases as principal falls
- A. It increases steadily
- B. It remains exactly constant
- C. It decreases as principal falls
- D. It becomes zero immediately
Explanation
Interest is calculated on the outstanding loan balance. As regular payments reduce the principal, the interest portion decreases and the principal portion increases, while the total instalment remains constant.
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About Financial Mathematics: Interest, Annuities and Discounting
Financial mathematics covers simple and compound interest, principal, rate, time, accumulated value and present value. It also includes annuities, regular payments, sinking funds, loan repayments and discounting, with a distinction between ordinary annuities and annuities due and between trade discount and mathematical discount.
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