Chapter 14 : Interest Rate Analysis and Constant Payment Mortgages

Question 1

When a monthly payment is divided in half and paid every two weeks, it is known as a…

Answer 1

When a monthly payment is divided in half and paid every two weeks, it is known as a…

Answer:
…biweekly accelerated payment.

Question 2

What is an outstanding balance?

Answer 2

An outstanding balance is the amount of principal owing to the lender at a specific point in time.

Question 3

Define effective annual rate.

Answer 3

Define effective annual rate.

Answer:

An effective annual rate j1 is an annual interest rate compounded once a year.

Question 4

When is the outstanding balance of a loan the greatest?

Answer 4

When is the outstanding balance of a loan the greatest?

Answer:
The outstanding balance of a loan is greatest at the time the loan is created.

Question 5

When comparing interest rates to one another, it is necessary to compare rates that have the ______ frequency of compounding in order to accurately assess the cost of borrowing.

Answer 5

When comparing interest rates to one another, it is necessary to compare rates that have the
same
frequency of compounding in order to accurately assess the cost of borrowing.

Question 6

The amortization period is used to calculate ___ ____ __ ___ ______ ______.

Answer 6

The amortization period is used to calculate the size of the required payments.

Question 7

Define nominal rate of interest.

Answer 7

A nominal rate of interest is an interest rate quoted as a rate per annum. It is equal to the interest rate per compounding period multiplied by the number of compounding periods.

Question 8

Two interest rates are said to be equivalent if…

Answer 8

Two interest rates are said to be equivalent if…

…for the same amount borrowed, over the same period of time, the same amount is owed at the end of the period of time.

Question 9

With constant payment mortgage loans, a large portion of each of the early payments is allocated to the payment of _________.

Answer 9

Answer:
With constant payment mortgage loans, a large portion of each of the early payments is allocated to the payment of interest.

Question 10

Consider a fully amortized loan. If the periodic payments are rounded up to the next higher dollar, how will this affect the size of the final payment?

Answer 10

Rounding up payments allows the borrower to pay off the loan faster, and pay less interest in total. The final payment will become smaller.