Loan C has the same principal amount, payment amount, and maturity date as Loan D. However, Loan C is structured as an annuity due, while Loan D is structured as an ordinary annuity. Loan C's interest rate is:
A) Higher than Loan D.
B) Less than Loan D.
C) The same as Loan D.
D) Indeterminate compared to Loan D.

Question

Quizplus · Accepted Answer

The interest rate for Loan C will be higher than Loan D because Loan C is structured as an annuity due, which means that the first payment is due immediately. This means that the lender has access to the funds earlier, making it less risky, and thus allowing for a lower interest rate for Loan D, which has a payment due at the end of the period. Therefore, the interest rate for Loan C will be higher to compensate for the earlier payment.

Loan C Has the Same Principal Amount, Payment Amount, and Maturity