Question 25

A borrower who pays interest only for the entire term and then repays the principal in one lump sum at maturity has a straight loan.

A straight loan is characterized by the borrower only paying interest throughout the term of the loan, with the principal repaid as a lump sum at the end. This structure allows for lower initial payments but requires a significant payment at maturity.

A) fully amortized loan

A fully amortized loan involves regular payments that cover both interest and principal over the term of the loan, resulting in the loan being completely paid off by maturity. This option is incorrect as it does not align with the structure of only paying interest during the loan period.

B) straight loan

A straight loan is defined by the borrower paying only interest throughout the term, with the entire principal amount due at the end. This option accurately describes the situation presented in the question, making it the correct answer.

C) term loan

A term loan refers to a loan with a specific duration and repayment schedule, but it does not specify the payment structure. Term loans can be fully amortized or interest-only, making this option too broad and not specific enough to describe the situation.

D) partially amortized loan

A partially amortized loan involves payments that cover some of the principal along with interest, but not enough to fully pay off the balance by maturity. Since this option implies that the borrower is making principal payments before the end of the term, it does not fit the description provided in the question.

Conclusion

The straight loan is the only option that accurately represents a loan structure where the borrower pays interest only and repays the principal in one lump sum at maturity. All other options either involve different payment structures or are too general, failing to meet the specific criteria outlined in the question.