11.5 Amortization Review

Amortization is the paying off of debt with a ____________________ repayment schedule in regular installments over a period of time. Examples include a mortgage or a car loan.

• fixed

• variable

• differentiated

• fluctuating

A portion of each payment is for interest while the remaining amount is applied towards the __________________________ balance.

• principal

• interest

• interest rate

• loan term

Initially, a large portion of each payment is devoted to __________________________.

• interest

• the principal balance

• loan term

• interest rate

As the loan matures, larger portions go towards paying down the ___________________________.

• principal balance

• interest

• interest rate

• loan term

If you have an amortized loan, your monthly payment will ______________________________.

• always be the same

• always be different

• sometimes be the same

• never be the same

If a friend who’d never heard of amortization before asked you to explain how loan payments work, what would you say?

• Amortization is a scheduled breakdown of how much you’ll pay every month (fixed) to repay a loan. It shows what portion of your payment is going to interest and principal each month.

• Every month, you pay the interest due first, and then all remaining portions of your payment goes toward paying down the principal balance.

• Both options are true.

Find the monthly payment necessary to pay off the loan with the following loan amount, the annual interest rate, and the length of the loan.

Amount: $6000

Rate: 8%

Time: 3 years

• $160.99

• $188.19

• $208.40

• $245.88

Find the monthly payment necessary to pay off the loan with the following loan amount, the annual interest rate, and the length of the loan.

Amount: $1900

Rate: 8.25%

Time: 18 months

• $112.59

• $154.32

• $168.01

• $176.56

Mrs. Taormina has won the lottery for $3,400,000. She can take her prize as one lump sum of $1,500,000 or 20 yearly payments of $170,000 (interest rate of 10%).

Choose the best statement below:

• She should take one lump sum of $1,500,000.

• She should take 20 yearly payments of $170,000. This will amount to $1,447,884.95.

• She should take 20 yearly payments of $170,000. This will amount to $1,847,884.95.

• She should take 20 yearly payments of $170,000. This will amount to $2,250,884.95.