Chapter 6: Part 2

2 ways to calculate balloon payment

1. Find the present value of the payments remaining after the loan term 2. Amortize the loan over the life to find the ending balance

EAR formula

(1+r/m)^m-1

Simplest form of a loan

A pure discount loan

Principal

Original loan amount

A lump sum payment to pay off the balance of a partially amortized loan is called a ______ payment

balloon or bullet

Most common way to repay a loan is to pay

A single fixed payment every period which included both interest and principal

Another common name for effective annual rate =

Annual percentage yield

What payment methods amortize a loan

Fixed Payments that result in a zero loan balance Interest plus fixed amount

Ways to amortize a loan

Pay principal and interest every period in a fixed payment Pay the interest each period plus some fixed amount of the principal **In an amortized loan some principal is repaid each period**

Amortization

Process of paying off a loan by regular reducing the principal

Given the same APR, more frequent compounding results in

higher EARs

For a positive stated annual interest rate and multiple compounding periods per year, the EAR is always _______ the APR

larger than

With interest only loans that are not perpetuities, the entire principal is

repaid at some point in the future

Partial amortization loan

1. Amortization period is longer than the loan period 2. The monthly payment is based on a longer amortization period than the maturity of the loan 3. The Borrower makes a large balloon payment at the end of the loan period 4. The monthly payments do not fully pay off the loan by the end of the loan period

Amortization of a Fixed Loan

1. The amount of interest paid decreases each period 2. The principal amount paid increases each period

In the excel setup of a loan amortization problem, which of the following occurs

1. To find the principal payment each month, you subtract the interest payment from the total payment 2. The payment is found using PMT(rate,nper,-pv,fv)

The payments in a ______ amortization loan are not based on the life of the loan

partial

Because of _____ and _____, interest rates are often quoted in many different ways.

tradition; legislation

Which type of amortization is most commonly used in the real world for mortgages and car loans

Fixed payment

APR

The interest rate per period multiplied by the number of periods in the year

EAR

The interest rate started as though it were compounded once per year

Payday Loans

allow you to borrow now and repay later

Compared to a comparable fixed payment loan, the total interest on a fixed principal loan is _____

less