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

Compared to a similar fixed payment loan, the total interest paid on a fixed principal loan is:

The same, since both loans have equal total payments

Less, because the outstanding principal decreases more rapidly

More, because the interest rate is applied to the original principal throughout

More, because the payments are higher in the early years

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Verified step by step guidance

Understand the difference between a fixed principal loan and a fixed payment loan. In a fixed principal loan, the principal repayment amount remains constant, while the interest is calculated on the remaining balance. In a fixed payment loan, the total payment (principal + interest) remains constant, but the proportion of principal and interest changes over time.

Recognize that in a fixed principal loan, the outstanding principal decreases more rapidly because the principal repayment is fixed and does not depend on the interest calculation. This results in lower interest payments over time as the remaining balance decreases.

Compare this to a fixed payment loan, where the interest is calculated on a higher outstanding balance in the earlier years, leading to slower reduction of the principal and higher total interest paid over the life of the loan.

Analyze the options provided in the problem. The correct answer is 'Less, because the outstanding principal decreases more rapidly,' as this aligns with the characteristics of a fixed principal loan.

Conclude that the total interest paid on a fixed principal loan is less compared to a similar fixed payment loan due to the faster reduction in the outstanding principal, which reduces the interest calculation over time.