Chapter 6: Mathematics of Finance Flashcards
Fee paid for borrowed money
Interest
Interest that is calculated based on the principal amount borrowed/invested not including the previous interest/s
Simple Interest
Simple Interest Formula
I = PRT
Future/Maturity Value for Simple Interest Formula
A = P + I
- Is an interest calculated on any balance including previous interest/s
- Future amount/value of the money loaned/invested is usually the focus
Compound Interest
Amount calculated after n years of having compound interest
Compound Amount
Compound Interest Formula
A = P (1 + r/n)^nt
P = A / ((1 + r/n)^nt)
Small plastic/metal card issued by a bank/financial company
Credit Card
Represents a line of credit
Credit Card
Where to Get Credit Card
- Financial Institutions
- Department/Chain Stores
Account with money that you can borrow repeatedly
Line of credit
Deducting money from checking/savings account
Debit Card
7 Basic Credit Card Features
- Credit Card Type
- Balance
- Grace Period
- Annual Percentage Rate (APR)
- Credit Card Fees
- Credit Limit
- Rewards and Perks
Single credit card issuer may issue multiple versions of the same type of credit card
Credit Card Type
- Total amount owed
- Higher the credit card balance, the lower the available credit
Balance
Amount of time you have to pay your balance in full before a finance charge/interest is applied
Grace Period
Grace Period is typically how many days
20 - 25
Balance transfers/cash advances typically do not have a _________
grace period
If you carry balance from pervious month, you might not have a _______ for new purchases
grace period
Interest rate applied to any balance you carry past the grace period/amount of interest that is charged on a balance over the course of a year
Annual Percentage Rate (APR)
Maximum balance you can have on the credit card
Credit Limit
These include cashback, miles points, discounts
Rewards and Perks
These are based on transaction/penalty
Credit Card Fees
6 Types of Credit Card Fees
- Annual Fee
- Application Fee
- Balance Transfer Fee
- Cash Advance Fee
- Decline Fee
- Foreign Transaction Fee
Fee for every year for using credit card
Annual Fee
Fee to apply for a card
Application fee
Fee to move balance of card to another
Balance Transfer Fee
Fee when you withdraw money from the card or an ATM
Cash Advance Fee
Fee when you try to make payment on something you do not have the money for
Decline Fee
Fee when buying something overseas
Foreign Transaction Fee
9 Types of Credit Cards
- Plain
- Balance Transfer
- Rewards
- Student
- Charge
- Secured
- Limited Purpose
- Subprime
- Business
3 Types of Rewards Credit Card
- Cashback
- Points
- Travel
No frills/rewards, has revolving balance up to a certain credit limit
Plan CC
Low introductory rate n balance transfers for a certain period of time
Balance Transfer CC
Offers rewards on purchases
Rewards CC
Reduce balance/redeem cash rewards only as credit
Cashback Rewards Cards
Based on how much you spend. E.g auto rewards/hotel rewards
Points Rewards Cards
- Mileage points
Travel Rewards Cards
- Designed for students, may have rewards/low-interest rate on balance transfers
Student CC
Do not have a spending limit, must be paid in full at the end of each month
Charge CC
Requires security deposit, equal to credit limit
Secured CC
Used at specific location, with minimum payment and finance charge
Limited Purpose CC
Worst credit card products, have highest interest and fees
Subprime CC
- For business use, personal credit history is still considered
Business CC
A type of payment made in the early stages of a purchase of an expensive good or service
Down Payment
The first/initial payment that one makes when one buys something with an agreement to pay the rest later
Down Payment
Amount that is borrowed to buy real estate
Mortgage Loan
When you make your property as collateral for a loan from a financial institution (bank)
Mortgage loan
Down payment formula
Down payment = purchase price x Down Payment %
Mortgage loan formula
Mortgage loan = Purchase price – Down Payment
- Refers to installment payment of loan
- Spreading out or gradual payment of a loan/debt over a period of time
- E.g monthly payments
Amortization
- The time period until the final payoff of the mortgage
- Total number of payments
Term
2 Types of Mortgages
- Adjustable-rate mortgage (ARM)
- Fixed-rate mortgage
Interest rate is fixed for an initial term then fluctuates with market interest rates
Adjustable-rate mortgage (ARM)
Interest rate that is set at the beginning and never changes over the entire term of the loan
Fixed-rate mortgage
Most common fixed-rate mortgage
15 and 30 years
Refer to a monthly payment on a mortgage
Monthly Mortgage Payment/Amortization
Monthly Mortgage Payment formula
A ((r/n)/1 - [1 + r/n]^-nt)
List of each mortgage payment, the payment number, the interest payment, the amount applied toward principal amount, and the resulting outstanding balance to be paid
Amortization Schedule
