Multiple Choice
Which of the following best defines the profit margin ratio?
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4. Merchandising Operations
Net Sales
Multiple Choice
In each succeeding payment on an installment note, the amount of interest paid:
A
increases with each payment
B
remains the same for every payment
C
is unrelated to the outstanding principal
D
decreases with each payment
Verified step by step guidance1
Understand the concept of an installment note: An installment note is a type of loan where the borrower makes regular payments that include both principal and interest over the life of the loan.
Recognize the relationship between interest and principal: Interest is calculated based on the outstanding principal balance. As the principal balance decreases with each payment, the interest portion of the payment also decreases.
Break down the payment structure: Each payment consists of two components: interest (calculated on the remaining principal) and principal repayment. Initially, a larger portion of the payment goes toward interest, but as the principal decreases, the interest portion becomes smaller.
Apply the logic to the question: Since the interest is calculated on the outstanding principal, and the principal decreases with each payment, the amount of interest paid decreases with each payment.
Conclude the reasoning: The correct answer is 'decreases with each payment' because the interest portion is directly tied to the remaining principal, which diminishes over time.
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