What does straight-line debt repayment mean?

What does straight-line debt repayment mean?

• A. Amortizing debt with equal principal payments
• B. Interest-only payments with a balloon at end
• C. Payments only cover interest
• D. Principal is paid at end in a lump sum

Answer: (A)

Straight-line debt repayment means you repay a constant amount of principal in each period. If you have a loan for a set term, you divide the total principal by the number of periods, so the principal portion each period is the same. Interest is charged on the remaining balance, so the interest portion declines over time as the balance falls. The result is a series of payments where the principal part is equal every period, and the total payment typically decreases over time. This matches the description of amortizing debt with equal principal payments, which is why that option is the best. The other options describe different debt structures: interest-only with a balloon at the end keeps principal intact until the end; payments that cover only interest never reduce principal; paying the principal in a lump sum at the end describes a bullet loan, not straight-line.

Straight-line debt repayment means you repay a constant amount of principal in each period. If you have a loan for a set term, you divide the total principal by the number of periods, so the principal portion each period is the same. Interest is charged on the remaining balance, so the interest portion declines over time as the balance falls. The result is a series of payments where the principal part is equal every period, and the total payment typically decreases over time.

This matches the description of amortizing debt with equal principal payments, which is why that option is the best. The other options describe different debt structures: interest-only with a balloon at the end keeps principal intact until the end; payments that cover only interest never reduce principal; paying the principal in a lump sum at the end describes a bullet loan, not straight-line.