Amortization MCQs
What is amortization?
a) The process of calculating monthly mortgage payments
b) The process of gradually reducing or paying off a debt over time
c) The process of depreciating an asset for accounting purposes
d) The process of valuing an investment portfolio
Answer: b) The process of gradually reducing or paying off a debt over time
Which of the following loans typically involves amortization?
a) Personal line of credit
b) Payday loan
c) Fixed-rate mortgage
d) Credit card cash advance
Answer: c) Fixed-rate mortgage
True or False: Amortization results in equal monthly payments over the life of a loan.
a) True
b) False
Answer: a) True
Which of the following statements is true regarding the amortization schedule?
a) The interest portion of the payment decreases over time.
b) The principal portion of the payment increases over time.
c) The total payment amount remains constant over time.
d) Both a) and b)
Answer: d) Both a) and b)
Which of the following methods is commonly used to calculate mortgage amortization?
a) Straight-line amortization
b) Declining balance amortization
c) Rule of 78s amortization
d) Constant payment amortization
Answer: d) Constant payment amortization
Amortization MCQs
What happens to the remaining loan balance at the end of an amortization period?
a) It is completely paid off.
b) It becomes zero.
c) It continues to accrue interest.
d) It can be refinanced.
Answer: a) It is completely paid off.
Which of the following factors affect the amount of interest paid over the life of a loan?
a) Loan amount
b) Interest rate
c) Loan term
d) All of the above
Answer: d) All of the above
True or False: Amortization is only applicable to loans and debts.
a) True
b) False
Answer: b) False
Which financial statement would include information about amortization?
a) Income statement
b) Balance sheet
c) Cash flow statement
d) None of the above
Answer: d) None of the above (Amortization is an accounting concept and is typically not reported on financial statements.)
What is the main purpose of amortizing a loan?
a) To reduce the overall cost of borrowing
b) To increase the interest expense
c) To inflate the principal balance
d) To extend the loan term
Answer: a) To reduce the overall cost of borrowing
Amortization MCQs
Which of the following is NOT a common method used for amortization?
a) Straight-line amortization
b) Sum-of-the-years’-digits amortization
c) Double-declining balance amortization
d) Variable-rate amortization
Answer: d) Variable-rate amortization
Amortization is most commonly used for which type of assets?
a) Tangible assets
b) Intangible assets
c) Financial assets
d) Current assets
Answer: b) Intangible assets
True or False: Amortization reduces the principal balance of a loan.
a) True
b) False
Answer: a) True
Which of the following factors affect the duration of amortization?
a) Interest rate
b) Loan term
c) Payment frequency
d) All of the above
Answer: d) All of the above
In straight-line amortization, how is the amount of principal reduction calculated?
a) Equal amounts are deducted from the principal in each period.
b) Principal reduction varies based on interest rates.
c) Principal reduction is calculated based on the remaining balance.
d) Principal reduction is not applicable in straight-line amortization.
Answer: a) Equal amounts are deducted from the principal in each period.
Amortization MCQs
Which financial term is commonly associated with amortization?
a) Appreciation
b) Depreciation
c) Accrual
d) Inflation
Answer: b) Depreciation
True or False: Amortization expenses are tax-deductible for individuals.
a) True
b) False
Answer: b) False (Amortization expenses are generally tax-deductible for businesses, not individuals.)
What happens to the interest expense over the life of an amortized loan?
a) It remains constant.
b) It increases.
c) It decreases.
d) It fluctuates based on market conditions.
Answer: c) It decreases.
Which of the following loans does NOT typically involve amortization?
a) Interest-only loan
b) Balloon payment loan
c) Adjustable-rate mortgage
d) Auto loan
Answer: a) Interest-only loan
What is the purpose of an amortization schedule?
a) To track the remaining loan balance over time
b) To calculate the interest expense for each period
c) To determine the total cost of borrowing
d) All of the above
Answer: d) All of the above
Amortization MCQs
Which of the following statements is true about the amortization process?
a) It only applies to long-term loans.
b) It reduces the principal balance at a constant rate over time.
c) It only involves interest payments.
d) It is only applicable to business loans.
Answer: b) It reduces the principal balance at a constant rate over time.
What is the relationship between the loan term and the total interest paid in an amortized loan?
a) Longer loan terms result in higher total interest paid.
b) Longer loan terms result in lower total interest paid.
c) Loan term does not affect the total interest paid.
d) The relationship between loan term and total interest paid is unpredictable.
Answer: a) Longer loan terms result in higher total interest paid.
True or False: Amortization can apply to both individual and business loans.
a) True
b) False
Answer: a) True
Which of the following amortization methods is based on the declining balance of an asset?
a) Sum-of-the-years’-digits
b) Double-declining balance
c) Straight-line
d) Variable-rate
Answer: b) Double-declining balance
Amortization is commonly used for which of the following purposes?
a) Paying off credit card debt
b) Spreading out the cost of a large purchase
c) Calculating depreciation for tax purposes
d) All of the above
Answer: d) All of the above
Amortization MCQs
What is the primary advantage of amortizing a loan?
a) Lower interest rates
b) Lower monthly payments
c) Faster loan repayment
d) Higher credit score
Answer: b) Lower monthly payments
True or False: Amortization affects both the principal and interest portions of loan payments.
a) True
b) False
Answer: a) True
Which of the following is NOT typically included in an amortization schedule?
a) Payment amount
b) Principal balance
c) Interest rate
d) Borrower’s credit score
Answer: d) Borrower’s credit score
What is the purpose of the amortization table?
a) To calculate the monthly payment amount
b) To track the interest paid over time
c) To determine the remaining balance at any given point
d) All of the above
Answer: d) All of the above
Which of the following loans is likely to have the highest interest expense over the life of the loan?
a) Fixed-rate mortgage
b) Adjustable-rate mortgage
c) Personal loan
d) Student loan
Answer: d) Student loan (as they often have longer terms and higher interest rates compared to other loans)