Financing

Question 1

Nominal/Annual Interest Rate (APR)

Answer 1

the interest rate for the year

Question 2

Effective Annual Interest Rate

Answer 2

the annual interest rate that reflects the compounding period within the year

Question 3

M

Answer 3

compounding periods per year

Question 4

When do you use ia?

Answer 4

1. payments are calculated on a yearly basis

2. interest compounds more frequently

Question 5

c

Answer 5

number of interest periods per payment period

Question 6

k

Answer 6

number of payments per year

Question 7

Continuous Compounding

Answer 7

compounding periods approach infinity

Question 8

2 Types of Loans

Answer 8

amortized and interest only

Question 9

Amortized Loans

Answer 9

loan is repaid with equal periodic installments

Question 10

Interest Only Loans

Answer 10

only interest is paid; no principal

Question 11

Fees

Answer 11

expenses the lender charges to lend money

Question 12

Finance Charges

Answer 12

the cost of borrowing

Question 13

Periodic Interest Rate

Answer 13

interest rate the lender charges

Question 14

Term of the Loan

Answer 14

amount of time to pay off the loan

Question 15

Tubular Method

Answer 15

creating a table of regular payments, interest, and principal to find the balance

Question 16

Remaining Balance Method

Answer 16

using formulas to determine payment, interest, and principal to find the balance at the end of period n

Question 17

Mortgage

Answer 17

long term amortized loan for houses and properties

Question 18

Conventional Mortgage

Answer 18

borrowing less than or equal to 80% of the appraised value of the asset

Question 19

High Rate Mortgage

Answer 19

borrowing more than 80% of the appraised value of the asset

Question 20

Collateral Mortgage

Answer 20

requires other assets in addition to the house/property to secure the loan

Question 21

Amortization Period

Answer 21

number of years to repay the loan

Question 22

Term

Answer 22

number of years at which point the interest rate will be renegotiated; principal can be payed then without penalty

Question 23

Fixed Rate Mortgage

Answer 23

interest rate remains constant for the term

Question 24

Variable Rate Mortgage

Answer 24

interest rate fluctuates with prime during the term

Question 25

Open Mortgage

Answer 25

any amount of the principal can be payed whenever without penalty

Question 26

Closed Mortgage

Answer 26

borrower is penalized if they over pay during the term of the mortgage

Question 27

Advantages of Interest Only Loans

Answer 27

smaller equal payments; cheaper

Question 28

Disadvantages of Interest Only Loans

Answer 28

don’t build equity, higher payments later, typically higher interest rates