David borrowed $120,000 for his business to be repaid in six equal annual installment. The lender charges 6.5 percent interest on the amount of the loan balance that is outstanding at the beginning of each year. The interest component in the amount of the annual installment will be the smallest at the end of:

Question

Quizplus · Accepted Answer

Since the loan is being repaid in six equal annual installments, the principal payment will be the same each year. Therefore, the interest component of each installment will decrease as the loan balance decreases.

At the end of the loan term (sixth year), the loan balance will be the smallest, and therefore the interest component of that installment will be the smallest as well. Therefore, the correct answer is A) sixth year.

David Borrowed $120,000 for His Business to Be Repaid in Six