BUSINESS ADMINISTRATION
FINANCIAL MANAGEMENT
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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The interest payment for a period is equal to the periodic interest rate multiplied by the beginning-of-the-period principal balance.
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The remaining principal balance at the end of a payment period is equal to the beginning-of-the-period principal less the total payment.
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The total payment is calculated by using the present value of an annuity formula.
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All of the above are true.
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Detailed explanation-1: -Principal is the money that you originally agreed to pay back. Interest is the cost of borrowing the principal. Generally, any payment made on an auto loan will be applied first to any fees that are due (for example, late fees).
Detailed explanation-2: -Interest portion is declining because in each installment there is some principal repaid which decreases the principal balance in each subsequent period.
Detailed explanation-3: -In accounting, the term ‘principal payment’ applies to any payment made that actively reduces the amount due on a loan. While some payments involve merely managing the interest charged on a loan, a principal payment involves reducing the debt owed.
Detailed explanation-4: -Answer and Explanation: Annuity refers to a series of equal cash inflow over time. Meanwhile, amortization is allocating a cost over a certain amount over time (cash outflow).