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¶ … interest paid at the beginning of a loan period than at the end of the loan period?
Whether an equal total payment plan is adopted or an equal principle plan, in both cases the interest paid at the beginning of a loan repayment period is more than at the end. This is because the interest is calculated on the amount that is loaned. When the first payment is made then a specific principle amount that the borrower has paid for is deducted from the total loan given. Thus the total amount loaned reduces and hence the interest on the new amount is lesser for the second payment.
Using an example of an equal principle plan, if a borrower borrows $10,000 for a repayment plan of 10 years at the rate of 10% per annum, the premium will be divided equally in 10 parts. Which means that each year $1,000 will be deducted from the original loan. Hence interest for the first payment will be calculated as 10/100 x 10,000 = $1,000
Thus the total amount of the first payment will be $2,000. This includes $1,000 for the interest and another $1,000 which will be deducted from the original loan. This leaves the amount...
Similarly for the third year the total amount loaned will again be reduced to $9,000 - $1,000 = $8,000 and thus the interest paid will further reduce. This pattern will go on till the last year where the total amount loaned would be reduced to $1,000 with a more reduced interest paid.
As seen from the example given, the interest paid in the beginning of a loan period is high because the actual amount loaned is high. With time as the total amount loaned reduces, the interest paid reduces.
2) Is a dollar today worth more than a dollar tomorrow? Why or why not?
A dollar today is worth more than a dollar tomorrow. A simple fact is that any company would prefer to have a dollar today than tomorrow. This is because a dollar today can be invested and would earn a return thus increasing its value tomorrow. Another way to look at it is that a dollar can be kept in a…
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