Question

An amortized loan:

a) requires that all payments be equal in amount and include both principal and interest
b) requires that all interest be repaid on a monthly basis while the principal is repaid at the end of the loan term
c) may have equal or increasing amounts applied to the principal from each loan payment
d) repays both the principal and the interest in one lump sum at the end of the loan term
e) requires the principal amount to be repaid in even increments over the life of the loan

Answer 1

The correct option: a) requires that all payments be equal in amount and include both principal and interest.

An amortized loan requires equal payments that cover both the principal and interest. The allocation between principal and interest changes over time, but the total payment remains constant.

Step-by-step explanation:

An amortized loan requires that all payments be equal in amount and include both principal and interest. This means that each payment made towards the loan consists of a portion that goes towards repaying the principal amount borrowed and another portion that covers the interest charged on the loan. The allocation between principal and interest may vary over time, but the total payment remains constant.

For example, let's say you take out a $10,000 car loan with a 5% interest rate for 5 years. If the loan is amortized, your monthly payments will be the same each month and will include part of the principal and part of the interest. As you make each payment, the portion dedicated to interest decreases, while the portion paying off the principal increases. By the end of the loan term, you would have repaid the entire principal amount borrowed along with the total interest charged.

Therefore, the correct answer is a) requires that all payments be equal in amount and include both principal and interest.