Calculating Interest Rates

Question 1

INTEREST RATE

Answer 1

Annual percentage of the loan outstanding that is charged to the borrower. Measures the value of an investment or loan.

Question 2

YIELD

Answer 2

Measures the profitability of an investment over a set period of time (typically a year, expressed as a %)

Question 3

RETURN

Answer 3

Measures the profitability of an investment over a set period of time (same as yield, expressed as a currency amount)

Question 4

SIMPLE INTEREST RATE

Answer 4

The total interest charge of a loan.

Question 5

COMPOUND INTEREST RATE

Answer 5

Rate in which interest of one period is added to the capital in the next period. (“interest on interest”)

Question 6

LOAN

Answer 6

Financial transaction in which the lender lends the borrower money in exchange of the principal plus interest.

Question 7

FRENCH AMORTIZATION METHOD

Answer 7

Characterized by interest payments at the end of each period and constant installments.
(Interest decreases and amortization increases as payment periods pass)

Question 8

BULLET LOAN

Answer 8

Loan in which periodic payments cover interest only and typically not amortized over the life of the loan.
(Final payment repays the entire principal + last period interest)

Question 9

EQUAL CAPITAL AMORTIZATION

Answer 9

The amortized capital is the same each period and the interest payments are calculated on the decreasing capital.

Question 10

ANNUAL PERCENTAGE YIELD

APY

Answer 10

The true cost of borrowing money since it accounts for any fees included in a loan, accounting for the effects of compound interest.

Question 11

EFFECTIVE ANNUAL RATE

EAR

Answer 11

Makes the actual value of the money received the same as the actual value paid plus any fees; accounting for compound interest and fees.

Question 12

TRUE EFFECTIVE RATE

Answer 12

Obtained by calculating the PV’s of all the CF’s of transaction costs, opening and closing fees, withholding, and tax payments.

Question 13

WITHHOLDING

Answer 13

Money (tax) that financial institutions retain from you in advance of your final taxes as a % of the earnings.

Question 14

PAYMENT OF TAXES

Answer 14

Situation where you’ll pay the tax rate at a specified time minus withholdings.

Question 15

ANNUAL PERCENTAGE RETURN (APR)

Answer 15

Represents the yearly cost (simple interest rate) of funds over the term of a loan.

APY = APR when loan compounds annually only.