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CFA Level I · CFA Level I Exam · Mortgage-Backed Security (MBS) Instrument and Market Features

In a fixed-rate, level-payment, fully amortizing mortgage loan, the portion of each monthly payment that goes toward interest most likely:

The interest portion decreases over time and the principal portion increases. Interest is calculated on the outstanding balance, which shrinks with each payment. Because the total payment is level, the part not used for interest repays more principal as the loan matures.

  1. Adecreases over time while the principal portion increasesCorrect
  2. Bstays constant while the principal portion increases
  3. Cincreases over time while the principal portion decreases

Explanation

With a level payment, interest is charged on the outstanding balance. As the balance falls, the interest portion falls, so the principal portion of the fixed payment must rise. The option with a constant interest portion ignores the declining balance.

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