CH 5 - Time Value of Money Flashcards
What is interest?
Percentage paid when money is borrowed or received when money is saved
What are the two types of interest?
Simple interest and compound interest
What are instalment loans?
A loan paid in equal periodic payments (instalments).
Each payment has an interest portion and a principal portion.
What is the interest portion of an instalment loan?
What the lender keeps and is based on the previous balance (what the borrower owed before the payment was made).
The interest portion decreases with each payment because the balance decreases.
What is the principal portion of an instalment loan?
Applied towards the debt and decreases the balance owed.
The principal portion increases with each payment because the interest portion decreases
What is a mortgage?
Instalment loan used to purchase real estate.
• Mortgages are compounded semi-annually in Canada and monthly in the US.
• Mortgages are typically paid monthly.
• Mortgage interest rates are guaranteed by the lender for a limited time (term).
• The mortgage payment is based on the amortization period.
