Chapter 6 concepts & Definitions

If an interest rate is given as 12% compounded daily, what do we call this rate?

A Stated or Quoted interest rate

Which is more relevant for financial decisions, a stated interest rate or an effective interest rate?

An Effective interest rate. to compare different investments or interest rate, we will always need to convert to effective rates.

You know the payment amount for a loan and you want to know how much was borrowed. Do you compute a present value or a future value?

PV

*Payday Loans*

Short-term loans made to consumers, often for less than two weeks.

Examples of Annuities

Student load payments Car load payments Insurance premiums Mortgage payments retirement savings

*Stated interest rate*

The interest rate expressed in terms of the interest payment made each period. Also known as the *quoted interest rate*

Which rate do you need to use in the time value of money calculations?

We need the period rate and we have to use the APR to get it.

What is a *pure discount loan*? What is a good example of a pure discount loan?

Where the principal is repaid at some future date without any periodic payments. Example: Treasury Bill

The present value of a growing perpetuity will decrease if

if the discount rate is increased.

What is an *interest-only loan*? What is a good example of an interest-only loan?

where the borrower pays interest each period and repays the entire principal at some point in the future. Example: bonds issued by the government and corporations

What is an amortized loan? What is a good example of an amortized loan?

where the borrower repays parts of the loan amount over time. Either equal or unequal principal payments over the life of the loan. Can be either *fixed principal amount plus interest for the period* or a *fixed payment amount where the amount of principal paid each time increases.*