Terminology Flashcards
ARM
An adjustable-rate home mortgage loan
Adjustable-Rate Loan
Loans, particularly credit card and home-mortgage loans, frequently provide for variable interest. Under such a loan, the interest rate is adjusted periodically to reflect general market conditions. In most cases, the rate provided is some general indicator of the rate of interest in the economy, such as the rate on new borrowings by the US Treasury, plus additional, specified percentage points that adjust for the riskiness of the borrower.
FV
Future Value of money after specified period of investment according to rate and compound period.
PV
Present Value of original investment.
Debt Instruments
A debt instrument (e.g., bonds or annuities) proves the holder cash payments at one or more specified future
times. Thus, the basic time value analysis can be applied
readily to give a present value to these instruments.
Bond
A bond represents the obligations of a borrower under a long-term borrowing. The borrower usually is a corporation or a government. The lender gives the borrower money (usually through investment banker agents). The borrower issues the bond to the lender (usually through investment banker agents). There is an underlying contract that controls the key details, particularly what the borrower is required to do in consideration for the borrowed funds. Interest is specified. A schedule of payments is provided. Another popular payment schedule is level payments – say,
monthly or quarterly. Frequently, the loan documents require the borrower to maintain certain assets or a certain amount of assets in order to reduce the risk of nonpayment.
Maturity
One common payment schedule in bonds is interest only (e.g., quarterly) with all of the principal due at some specified future date, i.e. the end of the borrowing, which also is called the “maturity” of the debt.
Default
If the borrower fails to fulfill an obligation, say, by nonpayment when specified or by failing to maintain required assets, this is referred to as “default.” maintain required assets, this is referred to as “default.” Frequently, the contract provides sanctions for default, such as acceleration of all required payments or an increase in future interest payments. The lender can sell its rights. A buyer of the bond steps into the shoes of the initial lender, with the same rights.
PMT
Payment
Net Lease
A lease that requires the lessee to provide the repairs, maintenance, taxes, and the like with respect to the leased property.
Loan v. Net Lease
The fundamental financial difference between a loan and a (net) lease is that, in the lease, the financer receives the leased property, and not just cash, at the end of the lease term. A lessor bears the risk with regard to the value of the leased property at lease end (usually with some adjustment for excess usage, damage, and the like), while a lender does not.
Residual Value
The value of leased property at the end of the lease term.
Annuity
A type of financial instrument that is readily valued with a present value calculation is a simple annuity. An
annuity pays a fixed amount per year (or other time period) for a fixed number of years (or other time period).
*NOTE: It is important that the annuity can be emulated by a savings account that bears a 10% annual yield. The similarity between the two financial transactions means that buyers and sellers of annuities should compare them to bank accounts and price annuities so that they are no better or worse (for either party) than bank accounts. Thus, if the discounted present value analysis values a bank account correctly, the analysis should value the simple annuity correctly.
DIY Annuity
An annuity where much more principal is amortized each year in the later years of a level-payment loan. Moreover, the change in the amount amortized from year to year increases in the later years.