CFA Level I · CFA Level I Exam · Fixed-Income Cash Flows and Types
A 3-year fully amortizing loan of 100,000 carries a 6% annual rate and level annual payments of 37,411 made at year-end. The principal repaid in the first payment is closest to:
The first payment repays about 31,411 of principal. Interest on the opening balance is 6,000, and the level payment of 37,411 less that interest leaves 31,411 to reduce the balance. Adding interest instead would give a wrong figure.
- A31,411Correct
- B37,411
- C43,411
Explanation
First-year interest is 100,000 x 6% = 6,000. Principal repaid = 37,411 - 6,000 = 31,411. Choosing 37,411 ignores the interest portion of the payment; 43,411 adds the interest instead of subtracting it.
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