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