Chapter 13 - Introduction to mortgage finance Flashcards
Who are savers?
Groups or individuals
whose current net income
exceeds current expenses
Who are borrowers?
Groups or individuals with
expenses larger than their
income in that period
What is an investment?
The spending of capital
today to receive benefits
in the future
What is an interest?
A fee charged for the
use of capital
What is Homogeneous?
Of the same kind; alike
What are mortgage-backed securities?
Pools of amortized insured residential
mortgage loans that are converted
into securities, then marketed to
investors in small individual units
What is a insured mortgage?
A mortgage whereby an insurance
company guarantees that the
lender can recover all of the funds
loaned in case of default
What is a conventional mortgage?
An uninsured mortgage loan where
the lender has only the personal
covenant of the borrower and the
value of the property as security
What is a monoline lender?
A mortgage loan company
that only focuses on
mortgage loans
What is a face value of a mortgage?
The amount of money the borrower
promises to repay (at the contract
rate of interest)
What is the book value of a mortgage?
The outstanding balance of the
loan at any particular point in time
What is a term?
The duration of the loan contract
What does fully amortized mean?
The entire amount of principal is repaid by
periodic payments and the final regular
payment will repay the remaining principal
balance and accrued interest
What does partially amortized mean?
The regular payments of principal and
interest of a mortgage loan are calculated
to repay the debt over an amortization
period that is longer than the loan term
What does amortization period mean?
The time that it takes to fully pay off a loan,
given the required periodic payments
What is a balloon payment?
Any payment of principal over
and above the regular periodic
payments, whether it occurs
during or at the end of the term
What is a open mortgage?
A mortgage loan in which a borrower
is allowed to prepay a portion of their
mortgage or the entire amount at any
time (with a small administrative fee)
What is a closed mortgage?
A mortgage loan in which individual
borrowers are prevented from prepaying
their mortgage without penalty, except
under certain circumstances
What is a nominal interest rate per annum?
The annual interest rate generally
quoted for compound interest
What is effective annual interest rate?
The nominal rate per annum,
compounded annually
Borrower’s Perspective
PV +
PMT –
FV –
Investor’s Perspective
PV –
PMT +
FV +
id = represents an interest rate per daily compounding period
iw = represents an interest rate per weekly compounding period
imo = represents an interest rate per monthly compounding period
iq = represents an interest rate per quarterly compounding period
isa = represents an interest rate per semi-annual compounding period
ia = represents an interest rate per annual compounding period
id = j365 ÷ 365
iw = j52 ÷ 52
imo = j12 ÷ 12
iq = j4 ÷ 4
isa = j2÷ 2
ia = j1 ÷ 1
I/YR Nominal interest rate per year (jm) – entered as a percent amount (not as a decimal) P/YR
“Periods per year” (m) – this indicates the compounding frequency of the nominal rate in I/YR and
is located below the PMT key
N Number of compounding or payment periods in the financial problem – this number will be
expressed in the same frequency as P/YR (i.e., if P/YR is 12, then N represents the number of
months)
PV Present value
FV Future value after N periods
PMT Payment per period – this is expressed in the same frequency as P/YR and N (i.e., if N is
months, PMT represents the payment per month)
