Midway through the life of an amortized loan, the percentage of the payment that represents interest could be equal to, less than, or greater than to the percentage that represents repayment of principal. The proportions depend on the original life of the loan and the interest rate.
Answer the following statement true (T) or false (F)
True
Rationale: This statement is true. The portion of the payment representing interest declines, while the portion representing principal repayment increases. The interest portion could be equal to, greater than, or less than the principal portion. We can work out some numbers to prove this point. Here's an example for a 3-year loan at a 10% and a 41.45% annual interest rate. The interest component is less than the principal at 10%, equal at about 41.45%, and greater at rates above 41.45%.
| Original loan | $1,000 | Original loan | $1,000 |
| Rate | 10% | Rate | 41.45% |
| Life | 3 | Life | 3 |
| Payment | $402.11 | Payment | $640.98 |
| Beg. | End. | Beg. | End. | ||||||
| Balance | Interest | Principal | Bal. | Balance | Interest | Principal | Bal. | ||
| 1 | $1,000.00 | $100.00 | $302.11 | $697.89 | 1 | $1,000.00 | $414.50 | $226.48 | $773.52 |
| 2 | $697.89 | $69.79 | $332.33 | $365.56 | 2 | $773.52 | $320.62 | $320.36 | $453.15 |
| 3 | $365.56 | $36.56 | $365.56 | $0.00 | 3 | $453.15 | $187.83 | $453.15 | $0.00 |
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