Discussion
A borrower subtracts the instalments paid from the original principal and reports the result as the outstanding balance. The figure is
Answer: C
Correct answer: too low, part of each payment having been interest
Each instalment is divided between interest and principal, and only the principal part reduces the balance. Subtracting the whole of every payment therefore credits the borrower with more repayment than has occurred, and the balance reported is below the truth. The correct figure is the present worth of the payments still to be made.
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