Question

Question 14 of 28

The Crystal City First National Savings and Loan charges more for a 10-year
boat loan than for a 5-year boat loan. What accounts for this difference?
A. The bank wants to discourage people from buying boats.
B. The bank wants to move money from personal loans to business
loans.
C. There are more people who want 10-year loans.
D. There is a greater risk that a 10-year loan will not be repaid.
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Answer 1

Answer: D. There is a greater risk that a 10-year loan will not be repaid.

Step-by-step explanation:

Loans with a greater time period will usually attract a higher charge because more could go wrong in that longer time period than in the shorter time. Events might occur that would impart the capability of the loanee to pay back the loan so the loaner would charge a higher amount to cater for this risk.

The higher charge on longer term instruments is known as the maturity premium and this premium increases the longer the life of the loan instrument.