When You Pay Off The Principal And All Of Th

When You Pay Off The Principal And All Of Th

When you pay off the principal and all of the interest at one time at the maturity date of the loan, we call this type of loan a(n):

A. amortized loan

B. interest-only loan

C. discount loan

D. compound loan

Paper For Above instruction

The question pertains to the classification of a specific type of loan characterized by the repayment structure where both the principal and the accumulated interest are paid at the end of the loan's term, which is at the maturity date. In financial terminology, this type of loan is known as a discount loan.

A discount loan differs from other loans such as amortized loans or interest-only loans, primarily in its repayment structure. An amortized loan involves periodic payments that cover both interest and principal throughout the loan term, gradually reducing the outstanding balance until maturity. Conversely, an interest-only loan requires periodic payments of interest only, with the principal remaining unchanged until a final lump-sum payment is made. A discount loan, however, involves the borrower receiving the funds upfront at a discounted amount and repaying the full face value at maturity, which implicitly includes interest embedded in the difference between the borrowed amount and the repayment.

This structure is utilized in certain types of short-term financing, such as treasury bills or other debt instruments issued at a discount. By paying the entire principal plus interest at maturity, the borrower effectively repays the loan in a lump sum, which is characteristic of a discount instrument. It is important to distinguish this from the amortized structure, where periodic payments are made, and interest-only loans, which only involve interest payments until the principal is repaid.

Therefore, the correct classification of this loan type, where the principal and interest are paid at the maturity date, is a discount loan. This aligns with the general understanding in financial markets and lending practices regarding the structure of such loans.

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