Question

Which of the following statement is incorrect?

a. A given amount of money you must pay out today is a greater burden than the same amount paid in the future.

b. Most of the answers are correct.

c. With an amortized loan, the amount of interest increases each year, and the amount contributed to principal decreases each year.

d. With an amortized loan, the amount of interest decreases each year, and the amount contributed to principal increases each year.

e. Money grows over time when the interest rate is positive.

Answer 1

Q. Which of the following statement is incorrect?

Answer: c. With an amortized loan, the amount of interest increases each year, and the amount contributed to principal decreases each year.

Explanation:

An amortized loan is a loan with scheduled periodic payments that consist of both principal and interest. An amortized loan payment pays the relevant interest expense for the period before any principal is paid and reduced.

Because interest is calculated based on the most recent ending balance of the loan, the interest portion of the loan payment decreases as payments are made. This is because any payment in excess of the interest amount contributes to reducing the principal, and this reduces the balance in which interest is calculated. As the interest portion of an amortization loan decreases, the principal portion of the payment increases. Therefore, interest and principal have an inverse relationship within the payments over the life of the amortized loan.