Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

FM > Unit 4 > Flashcards

Unit 4 Flashcards

1
Q

When repaying a loan and you get extra money, what are your two options?

A

Reduce the duration and maintain the initial installment

Reduce the installment and maintain the duration

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Partial amortization means …

A

repaying part of a loan in a lump sum

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Number of pending payments means

A

duration of loan

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

The excel formula to calculate the number of payments is

A

nper

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

The excel formula to calculate the rate is

A

IRR

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

The excel formula to calculate the installment is

A

PMT

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

In a loan contract, a borrower initially receives __________ from a lender, and is obligated to repay ___________ + ____________________.

A

initially an amount of money (called principal)

an equal amount of money to the lender at a later time (amortization of the loan), plus an additional sum of money, which is the interest of the loan.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Principal is …

A

an initial amount of money received by a borrower

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Amortization of a loan is …

A

an amount of money equal to the principal lent to a borrower, which is repaid to the lender at a later time

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

The interest of a loan is …

A

an additional sum of money paid to the lender at the time of amortization

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

The two types of loans are ___________ and ____________ . Which is used depends on ______.

A

Single-payment loans
Loans repaid by annuities

how the borrower repays the principal

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Single-payment loans are …

A

Loans that require the repayment of the entire principal

sum at the end of its duration and the interests is paid either periodically or not.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Loans repaid by annuities are …

A

loans where the principal and interest of the loan is repaid by an annuity but the interest is calculated on the unpaid balance.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Single-payment loans are also known as …

A

bullet loans

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Bullet loans are ….

A

loans that does not amortize over time and must be repaid with a single large payment (also called a balloon payment) at the end of the term of the loan.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

A single large payment is also called a

A

balloon payment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

We can differentiate two types of single-payment loans: __________ and _______________.

A
  1. When the interests are also paid at the end of the term of the loan (as part of the bullet payment)
  2. When the interests are paid periodically during the term of the loan.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Single-payment loans are typically ________ loans.

A

short-term loans

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

We use the single payment method for _________

A

bonds and other fixed-income securities.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Two amortization methods are ….

A
  1. Single Payment Method

2. Annuities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

In the single payment method, for bullet payment, Cn = -C0(1+i)^n

A

True

** negative because we pay

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

In the single payment method, for the loans where the interest is paid during the term of the loan, I = C0i% and Cn = C0(1+i)

A

True

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Annuity-amortized loans are normally just called …

A

Amortized loans

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

Amortized loans are …

A

loans with scheduled periodic payments or installments that are composed of two parts:

  1. the principal repayment
  2. the interest payment
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

“As” is called the

A

principal payment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

The two parts of an installment are …

A
  1. Principal Payment

2. Interest Payment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

The principal repayment (𝑨𝒕) is …

A

the amount of money the borrower pays to reduce the outstanding loan amount.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

The interest payment (𝑰𝒕) is …

A

the amount of money calculated over the outstanding loan amount, which the borrower pays in concept of interests.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

The total amount paid by the lender or installment (𝒂𝒕), is

A

the sum of the principal repayment and the interest payment.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

At = at-It

A

True because at = At + It

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
31
Q

𝑪𝒕 is …

A

the outstanding loan amount (the unpaid balance) at the moment t.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
32
Q

𝑪𝟎 is …

A

the amount of money the borrower receives from the lender (the principal of the loan).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
33
Q

True or False, when all the principal repayments are paid, the loan is fully amortized.

A

True

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
34
Q

Because a loan is fully amortized when all the principal repayments are made, the sum of all the principal repayments is equal to the principal.

A

True

𝐶0 = ∑𝐴t

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
35
Q

We can compute the unpaid balance at a given moment, Ct (that is, the part of the principal which has not been paid yet) as the unpaid balance at the previous period minus
the principal repayment of the period.

A

True

𝐶𝑡 = 𝐶𝑡−1 − 𝐴t = debt yesterday - debt today

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
36
Q

the unpaid balance at a given moment t is called

A

the part of the principal which has not been paid yet

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
37
Q

The unpaid balance at a given moment t can be also calculated as the principal of the loan minus all the paid principal repayments or the sum of all the principal repayments to be paid in the future

A

True

C𝑡 = 𝐶0 − ∑𝐴t
or,
Ct =∑C

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
38
Q

In addition to the principal repayments, the borrower must pay the interests.

A

True

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
39
Q

In annuity amortized loans, the interest paid are calculated as the rate of interest of the loan multiplied by the unpaid balance at the beginning of the period

A

True

It = i%*Ct-1

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
40
Q

The interest payments can be paid with the same periodicity as the principal payments, or more frequently than the interest payments.

A

True

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
41
Q

In annuity amortized loans, the interest is always computed over the unpaid balance.

A

True

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
42
Q

In loans with equal frequency for interest and principal payments …

A

we pay the principal payment and the interest

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
43
Q

In annuity amortized loans, if we pay the interest more frequently than principal payments,

A

We pay the interest one period and the interest + principal payment the other period.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
44
Q

The rule of financial equivalence states that …

A

The unpaid balance of a loan at any moment k can be calculated as the sum of the discounted value of all the pending installments.

𝑪𝒌 = ∑𝒂𝒕/(1+i)^t, where t = k+1

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
45
Q

𝑪𝒌 = ∑𝒂𝒕/(1+i)^t, where t = k+1 is called

A

The rule of financial equivalence

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
46
Q

Principal repayments, As =

A

as - Is

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
47
Q

Unpaid balance, Cs =

A

debt yesterday - debt today

Cs-1 - As

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
48
Q

Repaid balance, Ms =

A

Ms = C0 - Cs or ∑As

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
49
Q

Usually, loans are amortized by immediate annuities, i.e., the payment of the principal starts in the next period to the collection of the principal by the lender.

A

True

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
50
Q

Although loans are amortized by immediate annuities, it is possible to agree to have the payment of the principal paid by a deferred annuity.

A

True

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
51
Q

Immediate annuities means …

A

the payment of the principal starts in the next period to the collection of the principal by the lender.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
52
Q

The period between the granting of the loan

and the first payment of principal is called …

A

the grace period.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
53
Q

The two types of graces periods are:

A
  1. Interest-only grace period
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
54
Q

In an interest-only grace period,

A

the borrower only pays interests during the grace period

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
55
Q

In a no-payment grace period,

A

the borrower will make no payment during the grace period, but the interests will be compounding.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
56
Q

In a non-payment grace period, Cc-1 =

A

𝐶𝑐−1 = 𝐶0 (1 + 𝑖)^𝑐−1

You are paying interest on the new compounded amount, and C0 = the new compounded amount

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
57
Q

In interest-only grace period, 𝐶𝑛 =

A

Cn-1 * i%

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
58
Q

The installments of an annuity-amortized loan can be computed following different payment plans.

A

True

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
59
Q

The most commonly used plans in an annuity-amortized loan are the following:

A
  1. Equal principal payment (AKA straight line method)
  2. Equal installment loans (AKA French method)
  3. Varying-installment loans
  4. Anticipated interest method (less common in Spain)
  5. Sinking fund method (less common in Spain)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
60
Q

In the straight line method,

A

all the installments are composed of a constant principal payment 𝐴𝑡 = 𝐴 ∀𝑡 , plus the interest
on the unpaid balance.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
61
Q

Equal principal payment is also known as

A

(AKA straight line amortization)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
62
Q

Equal installment loans are also known as

A

(AKA French method)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
63
Q

In the French method,

A

all the installments are equal 𝑎𝑡 = 𝑎 ∀ 𝑡 .

64
Q

In varying-installment loans,

A

the installments vary following an arithmetic progression, 𝑎𝑡 = 𝑎𝑡−1 + 𝑑 ∀ 𝑡 or a geometric progression 𝑎𝑡 = 𝑎𝑡−1 * 𝑞 ∀ 𝑡 .

65
Q

Most of the loans in Spain are amortized following …

A

The equal installments method or equal principal payments

66
Q

Between the equal installments method and the equal principal payments, _____________ is more common

A

equal installments method

67
Q

In the straight line method (equal principal payment), to create the amortization schedule,

A
  1. Calculate the As (cte principal repayment)
  2. Calculate all the values of Ct (principal payment in each period)
  3. Calculate the interest payment, Is
  4. Calculate the total amount to be paid, as
68
Q

In equal principal payment method, the constant principal repayment, As =

A

C0/nper

principal of the loan/number of periods

69
Q

The total amount to be paid, the installment =

A

Interest, Is + Principal Repayment, As

70
Q

The total amount to be paid, the installment (as) =

A

Interest, Is + Principal Repayment, As

71
Q

In the equal installments method,

A

the main feature is both the interest payment and the principal repayment vary but their sum, i.e., the installment, is constant.

72
Q

The most common amortization method is the equal installments method.

A

True

73
Q

In the French method, the main feature is both the interest payment and the principal repayment vary but the installment is constant.

A

True

74
Q

In the equal installments method, as = _______.

A

C0/an)i = C0/PV

75
Q

To calculate the installment in Excel, we use the function ______

A

PMT

76
Q

To compute the value of the constant installment, we can use the rule of financial equivalence

A

True

77
Q

To calculate the unpaid balance at any moment, we can use _______________ because …

A

the rule of financial equivalence

the discounted value of all pending installments is unpaid balance.

78
Q

In the French method, once the unpaid balance is computed, we can also calculate the interest payment for any period t.

A

True

79
Q

The principal repayment can be computed as the difference between the installment and the interest
payment.

A

True

80
Q

In the French method, the principal repayments vary in a geometric fashion with a growth rate of the rate of interest.

A

True

81
Q

In the equal installments method, because the principal repayments vary in a geometric fashion with the growth rate of interest, the principal repayments during the first stages of the loan are smaller than the principal repayments during the last stages of the loan.

A

True

82
Q

In the French Method, because principal repayments are initially smaller, the installment is constant, and the interest payments will be higher at the first stages and smaller at the last stages.

A

True

83
Q

In the French Method, principal repayments are initially smaller, the installment is constant, and the interest payments will be higher at the first stages and smaller at the last stages.

A

True

84
Q

The differences between the equal installments method and the straight line method are ….

A
  1. In the French method, the installments, as, are cte, and in the straight line method, the installment decreases in an arithmetic progression.
  2. In the French method, the amortization repayment, At, follows a geometric progression with the rate of growth, i and in the Straight line method, it is cte.
  3. The interest payment decreases in the equal installments method and decreases with the principal payment in the equal principal payment amortization
  4. The installment composition is two squares (one for the interest and one for the principal) in the equal installments method and a square and a rectangle (interest and principal respectively) for the equal principal payment amortization.
85
Q

An installment decreasing in an arithmetic progression means …

A

the installment is the difference between two

consecutive installments −𝐴*i%

86
Q

For the same rate of interest and term, the straight line system implies a lower amount of interests paid, but the installments are higher in the first stages of the loan.

A

True

87
Q

The excel functions for the equal installments method are:

A
  1. PMT (rate;nper) to estimate the installment
  2. IPMT(rate;nper;pv) to estimate the interest payment
  3. PPMT(rate;nper;pmt;pv) to estimate the principal repayment
88
Q

Changes in the rate of interest and the prepayment of

principal can be applied to any type of loan.

A

True

89
Q

Changes in the rate of interest and the prepayment of

principal can be applied to _______.

A

equity installments loan

90
Q

Equity installments loan …

A

is the most common loan where changes in the rate of interest and the prepayment of principal occur

91
Q

In changes in the condition of a loan contract, floating interest loans are quite frequent nowadays.

A

True

92
Q

In a floating interest loan, the interest rate of the loan is referred to an interest index (such as the EURIBOR or the LIBOR).

A

True

93
Q

The interest of the loan is usually equal to the value of that index plus a certain spread.

A

True

94
Q

Since the interest of a loan is usually equal to the value of the index + a spread,

A

the interest rate of the loan will be similar to the normal rates of interest in the financial markets in any moment

95
Q

Usually, floating interest loans include an interest revision plan.

A

True

96
Q

In an interest revision plan,

A

the borrower and the lender agree to the period for revision (a year, a half-year, a quarter…).

97
Q

In an interest revision plan, at the beginning of every

period, the interest rate for that period is calculated as ___________ plus ________.

A

the value of the reference index

the spread

98
Q

The interest rate in an interest revision plan will work as a fixed rate during that revision period, but it may change for the next revision period.

A

True

99
Q

EURIBOR stands for …

A

The Euro Interbank Offered Rate

100
Q

EURIBOR is …

A

a daily reference rate, published by the European

Money Markets Institute.

101
Q

EURIBOR is based on the averaged interest rates at which Eurozone banks offer to lend unsecured funds to other banks in the euro wholesale money market (or interbank market).

A

True

102
Q

EURIBOR is based on the averaged interest rates at which Eurozone banks offer to lend unsecured funds to other banks in the euro wholesale money market (or interbank market).

A

True

103
Q

Eurozone banks offer to lend unsecured funds to other banks in the euro wholesale money market (or interbank market) at an average interest rate.

A

True

104
Q

In the prepayment of principal, loan contracts usually include a clause that allows the borrower to make non-periodical payments to reduce the unpaid balance, but the lenders usually charges a commission when the borrower makes such prepayments.

A

True

105
Q

Non-periodical payments to reduce the unpaid balance are called …

A

These payments are known as “prepayment of principal”.

106
Q

Given that the prepayments of principal modify the unpaid balance, it is necessary to recalculate
the amortization schedule.

A

True

107
Q

Prepayments of principal modify the unpaid balance.

A

True

108
Q

There are two options to recalculate the unpaid balance, which are:

A

Option 1: keeping the same installment, but modifying the maturity
Option 2: keeping the maturity, but reducing the installment

109
Q

When recalculating the unpaid balance, if we keep the installment the same but modify the maturity, this means that …

A

the lender can decide to keep paying the same installment but, as the unpaid balance is smaller after the prepayment of principal, the number of installments required to fully payback the loan will be lower.

110
Q

When recalculating the unpaid balance, same installment different maturity means …

A
  1. smaller unpaid balance after the prepayment of principal

2. lower number of installments required to fully payback the loan

111
Q

When recalculating the unpaid balance, same maturity, reduced installments means

A

the borrower decides to keep paying the same number of installments but, as the unpaid balance is smaller, the installments to be paid will be lower

112
Q

When recalculating the unpaid balance, same maturity, reduced installments means

A
  1. same number of installments but lower quantity

2. smaller unpaid balance

113
Q

In both options used to recalculate an unpaid balance, we use ____________ to calculate the new conditions of the loan.

A

The financial equivalence rule to calculate the new conditions of the loan

114
Q

APR stands for ….

A

Annual percentage rate

115
Q

The higher the interest rate,

A

the more expensive the loan would be.

116
Q

In practice, a loan contract usually presents some additional clauses that imply other payments for the borrower different from the principal and interests.

A

True

117
Q

Some additional clauses that may be in a loan contract are:

A
  1. Arrangement, origination, or application fee
  2. Legal and survey fees
  3. Early prepayment or redemption penalties
  4. Costs originated by the contracting of linked products
118
Q

An arrangement, origination, or applicable fee …

A

covers the administration costs of the lender,

such as issuing complex forms, implementing the transaction, and reserving the funds.

119
Q

Some administration costs of the lender are …

A

issuing complex forms, implementing the transaction, and reserving the funds.

120
Q

Legal and survey fees are for …

A

loan operations that require the intervention of notaries or the inscription of the operation in some public registries.

121
Q

Early prepayment or redemption penalties are …

A

fees that are collected by the lender if the

borrower makes a prepayment of principal.

122
Q

Costs originated by the contracting of linked products are …

A

when banks and lenders link the granting of the loan to the contracting of additional products (insurances, bank accounts…), which produce additional costs for the borrower.

123
Q

Costs originated by the contracting of linked products are …

A

when you get a loan and the bank or lender includes things like insurance or bank accounts and charge these to the borrower as part of the costs of the loan

124
Q

The existence of additional costs make the comparison of different loan operations more complex, so we need a measure that allows for the comparison among different loan operations.

A

True

125
Q

The measure that compares different loans is the Annual Percentage Rate (APR) of the loan.

A

True

126
Q

The APR can be defined as

A

the interest rate of a hypothetical loan in which the only costs are the interest, but which is equivalent to the loan we are evaluating.

127
Q

To compute the APR, we use the formula of the financial equivalence, equalling the
dated values of collections and payments.

A

True

128
Q

∑ Collections/(1+APR)^t = ∑ Payments/(1+APR)^t

A

True

129
Q

To directly get the APR, time must be measured in years.

A

True

130
Q

If we use any other time units other than time when measuring the APR, __________. Then, we can get the APR by computing the equivalent annual interest rate to that rate we got.

A

we will not get the annual percentage rate, but the percentage rate referred to the time unit we used.

131
Q

We can get the APR by computing the equivalent annual interest rate from that rate we got.

A

True

132
Q

Origination fee is a percentage of the principal

A

True

133
Q

Effective interest = ik/k

A

True

134
Q

To convert yearly rate to quarterly rate

A

(1+i)^(1/t)-1

135
Q

Each quarter has 3 months.

A

True

136
Q

redemption means to pay the entire debt

A

True

137
Q

No grace period means the debt is growing.

A

True

138
Q

In a 3 year grace period, the installment is compounded only on the interest.

A

True

139
Q

Ms = global debt - amt left to repay

A

True

140
Q

In interest-only grace period, we always keep in mind …

A
  1. the new interest
  2. the new debt
  3. the new number of terms
141
Q

variable pay market has the price …

A

sometimes up and sometimes down.

142
Q

Euribor always gives the nominal rate.

A

True

143
Q

We calculate installments like things will never change.

A

True

144
Q

Schedules are not cash-flows, they are …

A

payments.

145
Q

When the interest changes, it is total periods - periods already paid = period.

A

True

146
Q

IRR makes inflows = outflows = 0

A

True

147
Q

APR is the cost of the loan in percentage.

A

True

148
Q

We always pay interest on the outstanding loan.

A

True

149
Q

Installment = interest + amortization

A

True

150
Q

Amortization means principal repayment

A

True

151
Q

If we have different periods for different interest, we can’t use the PV function.

A

True

152
Q

The principal is the amount at the beginning of th loan.

A

True

153
Q

Interest is always paid on the debt alive.

A

True

154
Q

ik = (1+i)^(1/k)-1

A

True

155
Q

Debt today = debt yesterday - principal today

A

True

156
Q

Debt today = C0 - sum(C1:Ct)

A

True

FM (11 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions