Module 3 - Nominal & Effective Interest, Debt Flashcards
If you make quarterly payments into a bank account that earns 8%APR compounded monthly. What is the effective interest rate per i) quarter ii) annual
i) 2.01%
ii) 8.30%
After you work for a few years, you decide to start a savings account. You want to put away $500 into an account quarterly that has an interest rate of 8% APr compounded semi-annually. How much will you have after 40 years?
$556,703.38
What are amortized loans?
Loan repaid with equal periodic instalments, amount of principal and interest changes over period but payment is uniform
What is an interest only loan?
Only interest is paid on the loan, no payments to principal
You take out a $10,000 loan at 12% APR compounded monthly for 2 years with monthly payments.
i) What are your monthly payments?
ii) How much principal remains after 1 year?
iii) How much interest has been paid after 1 year?
i) $470.73
ii) $5298.10
iii) $945
How is a discount rate selected?
Based on yours (or company’s) time value of money
What is a mortgage?
A long term amortized loan for houses or properties
What is the amortization period vs term of the loan?
Amortization Period: total years to pay the loan
Term: number of years in which interest rate is renegotiated
What is an open vs closed mortgage?
Open: Allows borrower to make lump sum payments whenever
Closed: Borrower charged penalty if overpay during term
You buy a house for $200,000 with a down payment of $80,000 with 5 year term at 5% compounded semi-annually with an amortization period of 30 years, what are the i) weekly payments ii) biweekly payments iii) monthly payments
i)$221.34
ii) $442.88
iii) $960.64
What are the advantages and disadvantages of interest only loans?
(+) smaller payments
(-) Don’t build equity, higher payments later, higher risk for lender
