How does the amortization of the principal balance affect the amount of interest expense recorded each succeeding year?
A) Has no effect on interest expense each succeeding year
B) Increases the amount of interest expense each succeeding year
C) Reduces the amount of interest expense each succeeding year
D) The effect depends on the interest rate.

Question

Quizplus · Accepted Answer

The amortization of the principal balance reduces the outstanding balance on which interest is charged. As a result, the interest expense each succeeding year is calculated on the reduced principal balance, leading to a reduction in the amount of interest expense each year.

How Does the Amortization of the Principal Balance Affect the Amount