S7: Compounding Periods and Amortizing Loans

Question 1

Annual Percentage Rate (APR) (nominal rate)

Answer 1

Rate required for reporting, doesn’t consider compounding (Per period interest rate * periods per year)

Question 2

Effective Annual Rate (EAR) (APY)

Answer 2

The actual rate one pays or earns considering compounding periods

Question 3

Truth in Lending Act

Answer 3

Requires lenders to disclose APR, not Ear, unambiguously and prominently on loan documents

Question 4

Certificates of Deposit

Answer 4

Time deposits at a bank, pay slightly higher than savings account because it “locks up” your money for a period of time - withdrawing early incurs penalties

Question 5

Amortizing loans

Answer 5

Loans that pay principal down through time each period - each period interest is calculated on remaining principal of the loan (most mortgages and car loans)

Question 6

Amortization schedule

Answer 6

Shows how fixed payments consist of principal and interest component each period

Question 7

Calc steps for amortization schedule

Answer 7

Enter TMV info, then click -> 2nd -> Amort -> P1: time x -> P2: time y