FM FM Annuities and Loan Amortization 2

Question 1

Under the sinking fund method of loan repayment, the borrower each period:

Accepted Answer

Pays interest only to the lender and deposits into a separate sinking fund

Answer

Makes increasing principal payments to the lender

Answer

Makes blended equal payments covering both principal and interest

Answer

Pays full principal upfront then makes interest-only payments

Question 2

If the sinking fund interest rate equals the loan interest rate, how do total periodic payments compare between the sinking fund and amortization methods?

Accepted Answer

Total periodic payments are identical under both methods

Answer

The sinking fund method requires higher total payments

Answer

The amortization method requires higher total payments

Answer

It depends on whether the loan term exceeds 10 years

Question 3

A $50,000 loan at 8% annual effective interest is amortized over 10 years with level annual payments. What is the interest component of the very first payment?

Accepted Answer

$4,000

Answer

$3,250

Answer

$5,270

Answer

$6,980

Question 4

Using the retrospective method, the outstanding loan balance after k payments equals:

Accepted Answer

The original loan accumulated at rate i for k periods minus the accumulated value of k payments

Answer

The present value of remaining payments discounted at time k

Answer

The original loan minus the sum of all principal payments made

Answer

The original loan times (1+i)^n divided by total payment count

Question 5

A $100,000 loan at 6% annual interest is amortized over 20 years with level annual payments. After 10 payments, approximately what percentage of the original balance remains outstanding?

Accepted Answer

64%

Answer

72%

Answer

50%

Answer

58%

Question 6

Which statement about the amortization method for a level-payment loan is CORRECT?

Accepted Answer

Early payments consist mostly of interest

Answer

Total interest paid equals loan amount times the interest rate times the term

Answer

Early payments consist mostly of principal repayment

Answer

Late payments consist mostly of interest

Question 7

The principal repaid in the k-th payment of an amortizing loan (original loan L, n-period level payments, rate i) is given by:

Accepted Answer

(L / a(n,i)) × v^(n-k+1)

Answer

L × i × v^(n-k+1)

Answer

L × i / (1 - (1+i)^-n)

Answer

L × i × (1+i)^k