FRL 3000 Ch.6 Part 2

Which of the following are true about the amortization of a fixed payment loan?

- The amount of interest paid decreases each period - The principal amount paid increases each period

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

balloon or bullet

An effective annual rate of 7.12 percent is equal to 7 percent compounded ______.

semiannually

Another common name for the effective annual rate is the annual percentage ______.

yield

Which of the following are true about the amoritization of a fixed payment loan?

- The amount of interest paid decreases each period - The principal amount paid increases each period

Which compounding interval will result in the lowest future value assuming everything else is held constant?

Annual

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

tradition; legislation

Semi-annual compounding means that interest is paid ______ per year.

two times

What are two ways to calculate a balloon payment?

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

You agree to pay bak $1,100 in 4 weeks for a $1,000 payday loan. Your annual percentage rate (APR) rounded to two decimal places is _____% (Assume weekly compounding and assume that there are 52 weeks in a year.)

130.0 (1100/1000-1) x (52/4) = 130%

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

less

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

repaid at some point in the future

In the Excel setup of a loan amortiation problem, which of the following occurs?

- The payment is found using PMT (rate,nper,-pv,0) - To find the principal payment each month you subtract the interest payment from the total payment.

A 5-year $10,000 loan with a 15-year amortization period requires monthly payments at 10 percent interest compounded monthly. The monthly payments will be ______.

$107.46 =1000 / (1- (1/(.1/12)^12x15)/(.1/12))

Assume $100 earns a stated 10 percent rate compounded quarterly. What will the value of the $100 be after one year?

$110.38 FV= $100 X (1+.10/4)^4= 110.38

Assume a $100 investment earns a stated interest rate of 10%, compounded monthly. What will be the investment value after one year?

$110.47 FV=$100x(1+0.10/12)^12

You agree to repay $1,200 in 2 weeks for a $1,000 payday loan. What is your EAR assuming that there are 52 weeks in a year?

11,347.55% (1200/1000)^52/2-1= 11,347.55%

Amy took out a mortgage of $100,000 at 4.5% with monthly payments for 30 years. What is her payment to principal and interest each month?

$506.69 $100,000 = C x {[1-(1/1.045^30)]/0.045 $100,000 = [(1-0.27)/0.045) C = $100,000/16.22

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

Fixed payment

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

The general formula for the EAR is:

(1+r/m)^m - 1

Which of the following payment methods amorizes a loan?

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

Which of the following are true about a partial amortization loan?

-The amortization period is longer than the loan period -The monthly payments do not fully pay off the loan by the end of the loan period -The borrower makes a large balloon payment at the end of the loan period. -The monthly payment is based on a longer amortization period than the maturity of the loan.

Which of the following is the simpliest form of a loan?

A pure discount loan (With such a loan, the borrower receives money today and repays a single lump sum at some time in the future.)

Match the type of rate with its definition.

APR= The interest rate per period multiplied by the number of periods in the year EAR= The interest rate stated as through it were compounded once per year

Another common term for the effective annual rate (EAR) is the:

APY

If the interest rate is 10 percent per week, what is the EAR? [Please note that 10 percent per year is not an APR. It is a weekly rate (Quoted rate/m)]. Assume 52 weeks in a year.

EAR= (1 + .1)^52 -1 = 1.1^52 -1 = 142.0429 - 1 = 141.0429 or 14,104%

How frequently does continuous compounding occur?

Every instant

Suppose you paid off a $1,200 loan by paying $400 in principal each year plus 10 percent annual interest over a 3-year period. What is the total payment (interest plus principal) in Year 3?

$440 ($1,200 - (400*2)) = 400 $400 x 0.1 = $40 $400 + $40 =$440

The effective annual rate (EAR) takes into account the ______ of interest that occurs within a year.

compounding

The loan balance on partial amortization loans declinds so slowly because the ______.

payments are mostly interest

Amoritzation is the process of paying loans by regularly reducing the _____.

principal

The original loan amount is called the:

principal