On January 1,2011,Zenith,Inc.signed a $200,000,5%,20-year mortgage note to buy a new office building.The mortgage will be repaid in a series of twenty equal annual installment payments.Over the 20-year period,as each installment payment is made,the portion of the payment that is interest expense will ________.
A)increase
B)decrease
C)stay the same
D)The answer cannot be determined from the information given.

Question

Quizplus · Accepted Answer

The portion of each installment payment that is interest expense will decrease over time as the outstanding balance of the mortgage decreases. This is because interest is calculated as a percentage of the remaining principal balance, so as the balance gets smaller, the amount of interest charged on it also gets smaller.