Chapter 9 - Intro To Mortgage Finance

Question 1

Define diversification?

Diversification is the process of investing funds in more than one project or industry in order to reduce the risk of unexpected losses.

Question 2

What is a balloon payment?

A balloon payment includes any payment of principal over and above the regular payment.

Question 3

Incurring an obligation to repay a debt in order to invest or consume more than one currently owns is known as __________ ___________.

Incurring an obligation to repay a debt in order to invest or consume more than one currently owns is known as DEBT FINANCING.

Question 4

Define compound interest.

Compound Interest is:

• Interest which, during life of the loan, is charged or calculated at regular intervals and if not immediately paid ( as in an interest only loan) will, in subsequent periods, earn interest itself (as in an interest accruing loan).

Question 5

What is the difference between fully amortized and partially amortized mortgages.

Fully Amortized - loan is completely repaid by payments made over entire amortization period.

Partially Amortized - loan term is shorter than amortization period, and an outstanding balance exists at the end of the term.

Question 6

Describe how a constant payment loan works?

A constant payment loan is a loan which is repaid by equal and consecutive instalments that include both principal and interest.

Question 7

List 3 major sources of mortgage funds

1) Institutional lenders like banks
2) private individuals or lenders
3) government

Question 8

What is amortization

Amortization is the process of paying off a loan by periodic payments of blended principal and interest.

Question 9

The number of times compound interest is charged or calculated per year ( for example, semi annual or monthly), is referred to as the _________ _________.

Compounding Frequency

Question 10

What is the difference between interest only loan and interest accruing loan.

Interest Only
- loan is repaid with interest-only payments until the end of the loan term when the full principal and last interest payment is made.

Interest Accruing Loan
- requires a single payment of principal and accumulated interest at the end of the loan term.

Question 11

Interest Accruing Loan - Zero Payment Rule

Enter 0 in FV and PMT
If monthly payments then Enter 12 in P/YR
Enter number of months in N.

Enter FV to get amount outstanding Principle plus Interest.

Question 12

I/YR if daily interest given what you should do? Investor borrowed 1,000 at daily interest rate of .0675 (compounded daily) for 1 year. What will he owe at end of 1 year and no payments made.

.0675 is periodic rate which means you need to multiply by 365 = 24.637500 nominal rate. I/yr 24.637500. /. P/yr is 365 N is 365. PV is 1,000. Answer is FV = 1279.27

Question 13

Periodic Interest Rate

Sometimes the problem will give Periodic interest rate especially in Interest Accruing problems or I/yr problem

If daily then multiply by 365 to get Annual Nominal rate

If Semi Annual then multiply by 2 to get Annual Nominal Rate

Question 14

If loan is only interest only Payments like Line of Credit. What enter in PV and FV?

PV is loan Amount in Positive
FV is loan Amount in Negative

Question 15

If loan is only interest only Payments like Line of Credit. What to enter in the N if number of years for the loan is not given?

You can enter 1 or any number. It does not matter. The answer will the interest payment monthly or whatever P/yr PMTs per year was entered

Remember, it does not matter how long the loan is for, if you enter just 1 you will get right answer.

Question 16

Find N after entering all info
Ex/ how long will it take to fully amortize the loan.

When you press N you will get what you entered in P/yr. if it is month payments then this answer will be months.

If you entered 4 in Quarters. The answer will be quarters. To get years multiply by 3 will give you total number of months then x 12 to get years.

Question 17

What is:
EFFECTIVE INTEREST RATE?
Per Year
Per annum

Effective annual interest, or Per Annum or Per Year is
It is:

J1 Annual Rate.

All means same thing

Question 18

Nominal means:

J ( Annual)

J1 = effective annual interest rate. Eff

Question 19

If you are given anything other than years in the question. Ex 24 months. 4 quarters.

You enter exactly this number into N. make sure you P/YR is in months or quarters

Question 20

5 Cs of CREDIT

CHARACTER - will borrower repay the loan. It’s a subjective opinion based on application information

Capital — how much the borrower will invest. — Amount of DOWNPAYMENT

Capacity — can borrower repay. — use lending constraints

CREDIT — Credit History / repayment history— Review credit report

Collateral— what is used for loan security — real property

Question 21

Stress Test

Greater of contract rate plus 2.% or Bank of Canada rate.