Unit study guide · NISM Series X-A
Debt Management and Loans
2 questions in this unit
What this unit covers
- A loan’s opening principal is ₹6,00,000. Interest for the first month is charged at 1% of that opening principal. The borrower pays ₹14,000 at month-end, with no fees or other charges. How much of the payment reduces principal?
- A loan has principal outstanding of ₹5,00,000 immediately before a new monthly interest period. The borrower prepays ₹50,000 of principal at that moment. Interest for the month is 1% of opening principal, and there are no prepayment charges. Compared with making no prepayment, how much lower is that month’s interest?
Key ideas
From the practice bank · 1
A loan’s opening principal is ₹6,00,000. Interest for the first month is charged at 1% of that opening principal. The borrower pays ₹14,000 at month-end, with no fees or other charges. How much of the payment reduces principal?
₹8,000 is the part left to reduce principal after this month’s interest. First-month interest = opening principal ₹6,00,000 × 1% = ₹6,000. Payment is ₹14,000, so principal repaid = ₹14,000 − ₹6,000 = ₹8,000. Closing principal = ₹6,00,000 − ₹8,000 = ₹5,92,000. The question asks for the principal repaid, not the new balance. Remember: Separate interest, principal reduction and closing balance when reading a repayment schedule.
Hint Common mistake: Subtracting the whole instalment from principal without first accounting for interest.
X-A-019From the practice bank · 2
A loan has principal outstanding of ₹5,00,000 immediately before a new monthly interest period. The borrower prepays ₹50,000 of principal at that moment. Interest for the month is 1% of opening principal, and there are no prepayment charges. Compared with making no prepayment, how much lower is that month’s interest?
₹500 is the reduction in this month’s interest. Without prepayment: ₹5,00,000 × 1% = ₹5,000 of interest for the month. With a ₹50,000 prepayment immediately before the period: opening principal becomes ₹4,50,000 and interest is ₹4,500. Difference = ₹5,000 − ₹4,500 = ₹500. Equivalently, ₹50,000 × 1% = ₹500. Remember: The one-period saving is prepaid principal times the period’s rate when the timing and interest basis are as stated.
Hint Common mistake: Treating the entire prepaid principal as a saving, or extrapolating lifetime interest savings without the remaining repayment schedule.
X-A-020