Chapter 6 Pt 2

Question 1

How is the principle amount of an interest-only loan repaid?

Answer 1

In one lump-sum at the end of the loan period.

Question 2

Amortized Loans

Answer 2

May have equal or increasing amounts applied to the principal from each loan payment.

Question 3

Annual Percentage Rate (APR)

Answer 3

= term rate x number of times it compounds in a year

Question 4

Pure discount loans

Answer 4

What you receive is less (discount) than what you repay

Question 5

Balloon Loan: monthly and balloon payment

Answer 5

Monthly:
- Use the amortization period as N
Balloon:
- N changes to loan period
- use monthly payment to find FV

Question 6

Calculating PV for Annuity Due:

Answer 6

1) Remove 1st payment at t=0
2) Calculate PV
3) Add first payment to find the actual PV
- the first payment is today (same NPV)

Question 7

Growing Annuity and Perpetuity

Answer 7

Multiple cash flows that grow at a constant rate over regular intervals.

Question 8

Equation for Growing annuity and perpetuity (C, g, r)

Answer 8

C = 1st payment
g = growth rate
r = discount rate

Question 9

What does m stand for in the equations for EAR/APR?

Answer 9

of payments per year

Question 10

How to calculate interest and principal in each payment?

Answer 10

Interest = Loan amount (- down payment if applicable) x interest rate

Principal = payment - interest