Chapter 4 (Interest Rates & Fixed Rate Mortgage Loans) Flashcards
There is a ___ to borrow money.
cost
There is a ___ to invest.
required return
if investors expect inflation, ___ must be added to the rte they require
interest rates
the higher the risk the higher the ___
return
What is the interest rate formula for a mortgage?
It =R1 + F1 +P1
R1 = real rate (risk free) F1 = inflation rate (expected) P1 = risk premiums
risk that borrowers will default on obligations to repay interest and principal
default risk
the uncertainty about what interest rate to charge when a loan is made
interest rate risk
the risk that the loan will be prepaid when interest rates fall below the loan contract rate
prepayment risk
securities that can be easily sold and resold in well established markets will require lower premiums than those that are more difficult to sell
liquidity risk
risk associated with mortgage lending that also may result in a premium; can refer to changes in the regulatory environment in which markets operate
legislative risk
the process of loan repayment over time
amortization
loan payment pattern used most extensively in financing single family residences and, to a lessor extent, income-producing properties such as multifamily apartment complexes and shopping centers
constant payment mortgage loans
lender has interest rate risk
fixed rate
borrower has interest rate risk
adjustable rate
the pay rate will exceed the accrual rate; the monthly payments will exceed accrued interest by an amount sufficient to pay the accrued interest due each month and fully repay the loan by the maturity date
fully amortizing loan
