Multiple Choice
If John takes out a 30-year mortgage of \$200,000 at an annual interest rate of 5\% compounded monthly, how much total interest will he pay over the life of the mortgage?
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10. Time Value of Money
Time Value of Money Equations
Multiple Choice
How does a higher Annual Percentage Rate (APR) affect the monthly payments and total interest paid on a fixed-rate loan, assuming the loan amount and term remain the same?
A
Monthly payments increase, but total interest decreases.
B
Monthly payments and total interest both decrease.
C
Monthly payments and total interest both increase.
D
Monthly payments decrease, but total interest increases.
Verified step by step guidance1
Understand the concept of Annual Percentage Rate (APR): APR represents the annual cost of borrowing, including interest and fees, expressed as a percentage. A higher APR means the cost of borrowing is more expensive.
Recognize the relationship between APR and monthly payments: For a fixed-rate loan, a higher APR increases the interest portion of each monthly payment, leading to higher monthly payments overall.
Analyze the impact on total interest paid: Since the APR is higher, the borrower pays more interest over the life of the loan, assuming the loan amount and term remain constant.
Compare the options provided: Evaluate each statement against the relationship between APR, monthly payments, and total interest. The correct answer is the one that reflects both monthly payments and total interest increasing.
Conclude that the correct answer is: 'Monthly payments and total interest both increase,' as this aligns with the financial impact of a higher APR on a fixed-rate loan.
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