Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

10. Time Value of Money

Time Value of Money Equations

Financial Accounting

10. Time Value of Money

Time Value of Money Equations

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Multiple Choice

If the interest rate on a fixed-payment loan increases while the monthly payment remains the same, what would be the impact on the number of months required to pay off the loan?

The number of months to pay off the loan would remain unchanged.

The loan would be paid off immediately.

The number of months to pay off the loan would increase.

The number of months to pay off the loan would decrease.

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Verified step by step guidance

Step 1: Understand the relationship between interest rates and loan payments. A fixed-payment loan means the monthly payment amount remains constant, regardless of changes in the interest rate.

Step 2: Recognize that an increase in the interest rate affects the portion of the monthly payment allocated to interest versus principal. Higher interest rates result in a larger portion of the payment going toward interest, leaving less to reduce the principal balance.

Step 3: Analyze the impact on the loan term. Since less of the monthly payment is applied to the principal, the principal balance decreases more slowly, requiring additional months to fully pay off the loan.

Step 4: Consider the mathematical formula for loan amortization. The formula for calculating the monthly payment includes the interest rate, loan amount, and loan term. If the interest rate increases while the payment remains fixed, the loan term must adjust to accommodate the slower reduction of the principal.

Step 5: Conclude that the number of months required to pay off the loan would increase due to the higher interest rate, as the fixed monthly payment is insufficient to maintain the original loan term.