Week 6 - Topic 5 - Applications of finance: Mortgages & Superannuation Flashcards
Name 4 things that are included in retail lending?
- Credit cards
- Personal loans
- Lines of credit
- Mortgages.
Fill in the following one-word gaps: Loans are _____ for lenders and ______ for borrowers
assets, liabilities
Name 4 things that interest rates depend on?
- Funding costs
- Loan purpose
- Creditworthiness
- Collateral
Who are the main 2 lenders?
- Banks
- Credit Unions
Define ‘Interest-only loans’?
Each loan repayment is interest only. The entire loan principal is due upon loan maturity.
Define ‘Fully amortising loans’?
Each loan repayment is comprised of interest and principal, so that by the final repayment, the entire loan principal is paid off. The majority of home loans are fully amortising loans
Define ‘Partly amortising loans’?
Each loan repayment is comprised of interest and principal. However, by the final repayment, there is a loan principal balance remaining to be paid off.
Define ‘Fixed-rate loans’?
The Interest cost of the loan is fixed, usually over a term of 1 – 5 years.
Define ‘Variable-rate loans’?
Interest cost is subject to change depending on how banks price credit and changes in the official cash rate.
Define ‘Split-rate loans’?
Some financial institutions allow part of the loan to be fixed, and the remaining part to be variable; e.g. ½ the loan is fixed, ½ the loan is variable.
Define ‘Equity Deposit’?
A financial institution will typically not lend 100% of the property price being purchased. The property buyer will have to accumulate and contribute an equity deposit that is usually the buyer’s savings of income over time.
What does ‘Loan-to-Value Ratio (LVR)’ mean
The LVR is the % of the property price that a financial institution will lend to a borrower. The most common LVR in the current market is 80%.
Define the term ‘Securitisation’?
is the gathering of financial assets or non-liquid real assets into one single portfolio. This is then split up into multiple equal units or shares, which are serviced with the cash flows of the original assets.
Name 5 examples of Securitisation?
- Company Shares
- Units in Managed funds, Real Estate Investment Trusts
- Exchange-traded funds; Commodity funds
- Mortgage-backed securities;
- Collateralised Debt Obligations
Name the 6 main categories of funds?
- Statutory Funds of Life Insurance Offices
- Superannuation Funds
- Public Unit Trusts
- Cash Management Trusts
- Exchange Traded Funds
6.Hedge Funds
What’s the difference between ‘open-ended funds’ and ‘closed-end funds’?
Open-ended funds are where capital invested may be redeemed at any time, while closed-end funds are where there are restrictions on capital redemptions.
Define ‘Active Management’ in terms of trading assets?
Fund managers aim to outperform the market by actively trading assets based on market expectations, focusing on market timing (buying cheap) and asset selection (what to buy). Charge higher fees.
Define ‘Passive Management’ in terms of trading assets?
Also called Buy and Hold, fund managers avoid market timing and trading, aiming to replicate market performance, such as with index funds. Charge lower fees.
What is Superannuation? Define and explain it?
Superannuation (Super) funds in Australia are managed funds designed to help individuals save for retirement. Employers contribute a percentage of an employee’s salary or wages into a super fund, which is invested and grows over time. Most Australian employees are required to contribute 11% of their annual salary (as of July 2023) by legislation.
