Mike deposited $100, 000 in a bank and procured a certificate of deposit on it, payable to himself, and for repayment in 5 years with a 5 percent interest rate.A year after that, Mike borrows $25, 000 from Jill, and gives her a promissory note to repay it in one year.As collateral, Mike gave Jill the certificate of deposit and asked to put in a prepayment clause to which Jill agreed.They mutually agreed that Mike could repay in monthly payments, as mentioned it in the note.
-In which of the following ways will the prepayment clause help Jill?
A)It helps Jill to shorten the repayment period when she wishes.
B)It helps Jill acquire the whole amount in one payment incase Mike defaults.
C)It allows Mike to repay earlier than the stipulated time.
D)It obligates Mike to pay interest on the money he defaults.

Question

Quizplus · Accepted Answer

The prepayment clause allows Mike to repay earlier than the stipulated time. This means that if Mike has the means to repay the loan earlier than the agreed-upon time frame, he can do so without incurring any penalties or fees. This benefits Jill because she will receive her money back earlier and can potentially use it for other investments or expenses. However, it is important to note that the prepayment clause does not prevent Mike from defaulting on the loan, so it is not applicable to choice B. Additionally, the clause does not obligate Mike to pay interest on defaulted amounts, so choice D is also incorrect.

Mike Deposited $100, 000 in a Bank and Procured a Certificate