Chapter 6 Finance Midterm 1

amortization schedule

- a table detailing each periodic payment on an amortizing loan

hedge fund

- big investors - big fees - not much regulation; "a black box"

interest only loans

- calls for the borrower to pay interest each period and to repay the entire principal (the original loan amount) at some point in the future - for a set term, the borrower pays only the interest on the principal balance, with the principal balance unchanged - most corporate bonds have the general form of an interest only loan

mutual fund

- small investors - small fees - much regulation

three basic types of loans

1. pure discount loans 2. interest only loans 3. amortized loans

over time the interest you pay on an amortized loan what?

decreases

over time the principal amount you pay on an amortized loan what?

increases

payday loans

- short term loans made to consumers, often for less than two weeks - you write a check that is postdated (the date on the check is in the future) and you give it to the company - the company gives you some cash - when the check date arrives, you either go to the store and pay the cash amount of the check, or the company cashes it

amortized loans

- the lender requires the borrower to repay parts of the loan amount over time - the process of providing for a loan to be paid off by making regular principal reductions is called amortizing the loan - the principal amount you owe will go down over time as you make regular payments - borrower makes a single, fixed payment every period

treasury bills

- used when the US government borrows money on a short term basis (one year or less) - a T-bill is a promise by the government to repay a fixed amount at some time in the future - it is a type of pure discount loan

pure discount loan

- with such a loan, the borrower receives money today and repays a single lump sum at some time in the future - also called zero coupon loans - common when the loan term is short - e.g. treasury bills