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

2. Why does the amount of interest you pay on a loan typically decrease every month when making regular payments?

Because the lender applies more of each payment to interest as time goes on.

Because the outstanding principal balance decreases with each payment, resulting in less interest being charged on a smaller amount.

Because the interest rate decreases over the life of the loan.

Because the total loan amount increases, reducing the interest portion.

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Verified step by step guidance

Understand the concept of loan amortization: When you take out a loan, the lender calculates the total amount of interest based on the principal balance and the interest rate. As you make regular payments, the principal balance decreases over time.

Recognize how interest is calculated: Interest is typically calculated as a percentage of the outstanding principal balance. This means that as the principal balance decreases, the amount of interest charged on the remaining balance also decreases.

Break down the payment structure: Loan payments are usually divided into two parts—interest and principal. Early in the loan term, a larger portion of the payment goes toward interest, while later payments allocate more toward reducing the principal.

Understand the impact of decreasing principal: With each payment, the principal balance decreases, which reduces the base amount on which interest is calculated. This is why the interest portion of the payment decreases over time.

Clarify the misconception: The interest rate does not change over the life of the loan (unless it's a variable-rate loan). The decrease in interest paid is solely due to the reduction in the principal balance, not because the interest rate decreases or the total loan amount increases.