final bus 122 exam 1 (ch 4-5)

Adjustable Rate Mortgage (ARM)

A mortgage on which the rate of interest, and therefore the size of the monthly payment, is adjusted based on market interest rate movements.

Fixed Rate Mortgage

The traditional type of mortgage, in which both the rate of interest and the monthly mortgage payment are fixed over the full term of the loan.

Which of the following are examples of an interest-earning checking account?

-Negotiable order of withdrawal (NOW) account -Share draft account

rental contract lease agreement

A legal instrument that protects both the lessor and the lessee from an adverse action by the other party; it specifies the amount of the monthly payment, the payment due date, penalties for late payment, the length of the lease agreement, deposit requirements, fair wear and tear definitions and provisions, the distribution of expenses, renewal options and early termination penalties, and any restrictions on children, pets, subleasing or using the facilities.

biweekly mortgage

A loan on which payments equal to half the regular monthly payment are made every two weeks.

mortgage loan

A loan secured by a mortgage on property. If the borrower defaults, the lender has the legal right to liquidate the property to recover the funds it is owed.

Shared Appreciation Mortgage

A loan that allows a lender or other party to share in the appreciated value when the home is sold.

Anchoring

A behavioral bias in which an individual tends to allow an initial estimate (of value or price) to dominate one's subsequent assessment (of value or price) regardless of new information to the contrary.

foreclosure

A borrower typically cannot make scheduled mortgage payments and the lender repossesses the property in an effort to recover the loan balance owed.

cashier's check

A check payable to a third party that is drawn by a bank on itself in exchange for the amount specified plus, in most cases, a service fee (of about $5).

traveler's checks

A check sold (for a fee of about 1 to 2 percent) by many large financial institutions, typically in denominations ranging from $20 to $100, that can be used for making purchases and exchanged for local currencies in most parts of the world.

Multiple Listing Service (MLS)

A comprehensive listing, updated daily, of properties for sale in a given community or metropolitan area; includes a brief description of each property with a photo and its asking price but can be accessed only by realtors who work for an MLS member.

Real Estate Settlement Procedures Act (RESPA)

A federal law requiring mortgage lenders to give potential borrowers a government publication describing the closing process and providing clear, advance disclosure of all closing costs to home buyers.

VA loan guarantees

A guarantee offered by the U.S. Veterans Administration to lenders who make qualified mortgage loans to eligible veterans of the U.S. armed forces and their unmarried surviving spouses.

certified check

A personal check that is guaranteed by the bank on which it is drawn.

down payment

A portion of the full purchase price provided by the purchaser when a house or other major asset is purchased; often called equity.

automated teller machines (ATMs)

A remote computer terminal that customers of depository institutions can use to make basic transactions 24 hours a day, 7 days a week.

time deposits

A savings deposit at a financial institution; remains on deposit for a longer time than a demand deposi

U.S. Treasury bill (T-bill)

A short-term (3- or 6-month maturity) debt instrument issued at a discount by the U.S. Treasury in the ongoing process of funding the national debt.

deposit insurance

A type of insurance that protects funds on deposit against failure of the institution; can be insured by the FDIC and the NCUA.

certificates of deposit (CDs)

A type of savings instrument issued by certain financial institutions in exchange for a deposit; typically requires a minimum deposit and has a maturity ranging from 7 days to as long as 7 or more years.

PITI

Acronym that refers to a mortgage payment including stipulated portions of principal, interest, property taxes, and homeowner's insurance.

closing costs

All expenses (including mortgage points) that borrowers ordinarily pay when a mortgage loan is closed and they receive title to the purchased property.

Future Account Balance equation

Amount on Deposit × Interest Factor OR PV×(1 + i)n

demand deposit

An account held at a financial institution from which funds can be withdrawn on demand by the account holder; same as a checking account.

convertible ARM

An adjustable-rate mortgage that allows the borrower to change to a fixed-rate mortgage within a specific time (13th or 60th month)

two-step ARM

An adjustable-rate mortgage with just two interest rates: one for the first five to seven years of the loan, and a higher one for the remaining term of the loan.

overdraft protection

An arrangement between the account holder and the depository institution wherein the institution automatically pays a check that overdraws the account.

open-end (finance) lease

An automobile lease under which the estimated residual value of the car is used to determine lease payments; if the car is actually worth less than this value at the end of the lease, the lessee must pay the difference.

Private Mortgage Insurance (PMI)

An insurance policy that protects the mortgage lender from loss in the event the borrower defaults on the loan; typically required by lenders when the down payment is less than 20 percent.

stop payment

An order made by an account holder instructing the depository institution to refuse payment on an already issued check.

In an arrangement that seems inconsistent, mutual savings banks are insured by the

BIF

debit cards

Specially coded plastic cards used to transfer funds from a customer's bank account to the recipient's account to pay for goods or services.

Step 1: Determine how expensive a car you can afford.

Do your research before you begin shopping. This can reduce the likelihood of spending more than you can afford.Useful background information includes your needs and wants in a vehicle, the advantages and disadvantages of buying or leasing, the availability of rebates and incentives, the value of your existing car, and how much car you can afford.

mortgage points

Fees (one point equals 1 percent of the amount borrowed) charged by lenders at the time they grant a mortgage loan; they are related to the lender's supply of loanable funds and the demand for mortgages.

Step 2: Calculate your target price based on the dealer's cost for the vehicle and its options, as well as the dealer's profit markup minus any rebates and incentives.

Identify the car that meets your needs and wants and obtain online quotes for three target cars at dealers in your vicinity. Test drive your target cars and ascertain if the salesman is someone you would like to do business with. Based on this and previously completed research, determine the maximum price that you are willing and able to spend on your new vehicle, including the desired options—net your rebates and other incentives.

homeowner's insurance

Insurance that is required by mortgage lenders and covers the replacement value of a home and its contents.

simple interest

Interest that is paid only on the initial amount of the deposit.

This account imposes limits on the number of checks that an account-holder can write per month.

MMDA

This account pays the highest interest rate of any checkable account.

MMDA

payment cap

On an adjustable-rate mortgage, the limit on the monthly payment increase that may result from a rate adjustment.

margin

On an adjustable-rate mortgage, the percentage points a lender adds to the index rate to determine the rate of interest.

Virtually all financial analysts agree that it is best to:

Start saving early •Save regularly. •Shift to another savings goal and a higher-yielding investment when you achieve a particular savings goal.

money factor

The financing rate on a lease; similar to the interest rate on a loan.

depreciation

The loss in the value of an asset, such as an automobile, that occurs over its period of ownership; calculated as the difference between the price initially paid and the subsequent sale price.

foreclosures

The process whereby lenders attempt to recover loan balances from borrowers who have quit making payments by forcing the sale of the home pledged as collateral.

rent ratio

The ratio of the average house price to the average annual rent, which provides insight into the relative attractiveness of buying a house versus renting in a given area of potential interest.

title check

The research of legal documents and courthouse records to verify that the seller conveying title actually has the legal interest he or she claims and that the title is free of all liens and encumbrances.

overdraft

The result of writing a check for an amount greater than the current account balance.

cash management

The routine, day-to-day administration of cash and near-cash resources, also known as liquid assets, by an individual or family.

account reconciliation

Verifying the accuracy of your checking account balance in relation to the bank's records as reflected in the bank statement, which is an itemized listing of all transactions in the checking account.

checkbook ledger

a booklet, provided with a supply of checks, used to maintain accurate records of all checking account transactions

negotiable order of withdrawal (NOW) account

a checking account on which the financial institution pays interest; NOWs have no legal minimum balance

Contingency Clause

a clause in a real estate sales contract that makes the agreement conditional on such factors as the availability of financing, property inspections, or obtaining expert advice

asset management account (AMA)

a comprehensive deposit account; offered primarily by brokerage houses and mutual funds

Money Market Deposit Account (MMDA)

a federally insured savings account, offered by banks and other depository institutions, that competes with money market mutual funds

Mortgage Broker

a firm that solicits borrowers, originates primarily conventional loans, and places them with mortgage lenders; the broker merely takes loan applications and then finds lenders willing to grant the mortgage loans under the desired terms

mortgage banker

a firm that solicits borrowers, originates primarily government-insured and government-guaranteed loans, and places them with mortgage lenders; often uses its own money to initially fund mortgages it later resells

condominium (condo)

a form of direct ownership of an individual unit in a multiunit project in which lobbies, swimming pools, and other common areas and facilities are jointly owned by all property owners in the project

money market mutual fund (MMMF)

a fund that pools the funds of many small investors and purchases high-return, short-term marketable securities

Conventional Mortgage

a mortgage offered by a lender who assumes all the risk of loss; typically requires a down payment of at least 20 percent of the value of the mortgaged property.

interest-only mortgage

a mortgage that requires the borrower to pay only interest; typically used to finance the purchase of more expensive properties

Graduated Payment Mortgage

a mortgage that starts with unusually low payments that rise over several years to a fixed payment

balloon payment mortgage

a mortgage with a single large principal payment due at a specified future date

purchase option

a price specified in a lease at which the lessee can buy the car at the end of the lease term

FHA mortgage insurance

a program under which the Federal Housing Administration (FHA) offers lenders mortgage insurance on loans having a high loan-to-value ratio; its intent is to encourage loans to home buyers who have very little money available for a down payment and closing costs

I savings bonds

a savings bond issued at face value by the U.S. Treasury; its practically fixed rates provides some inflation protection

series EE bonds

a savings bond issued in various denominations by the U.S. Treasury

share draft accounts

an account offered by credit unions that is similar to interest-paying checking accounts offered by other financial institutions

sales contract

an agreement to purchase an automobile that states the offering price and all conditions of the offer; when signed by the buyer and seller, the contract legally binds them to its terms

cooperative apartment (co-op)

an apartment in a building in which each tenant owns a share of the nonprofit corporation that owns the building

lease

an arrangement in which the lessee receives the use of a car (or other asset) in exchange for making monthly lease payments over a specified period.

Internet Bank

an online commercial bank

Checking accounts (checkable deposits)

are accounts that allow account holders to write checks against the balance. In addition to checks, these accounts usually offer debit, or check, cards that account holders can use either in an automated teller machine (ATM) or in a point-of-sale (POS) terminal.

Depository Institutions

are financial institutions, such as commercial banks, savings banks, and credit unions, that are authorized to accept deposits and loans.

Buydown

financing made available by a builder or seller to a potential new-home buyer at well below market interest rates, often only for a short period

Growing Equity Mortgage

fixed-rate mortgage with payments that increase over a specific period. Extra funds are applied to the principal so that the loan is paid off more quickly

compound interest

interest earned in each subsequent period is determined by applying the nominal (stated) rate of interest to the sum of the initial deposit and the interest earned in each prior period.

earnest money deposit

money pledged by a buyer to show good faith when making an offer to buy a home

index rate

on an adjustable-rate mortgage, the baseline index rate that captures interest rate movements

interest rate cap

on an adjustable-rate mortgage, the limit on the amount that the interest rate can increase each adjustment period and over the life of the loan

adjustment period

on an adjustable-rate mortgage, the period of time between rate or payment changes

The car-buying process can be broken down into four major steps

research, select, buy, and maintain.

electronic funds transfer systems (EFTSs)

systems using the latest telecommunications and computer technology to electronically transfer funds into and out of customers' accounts

property taxes

taxes levied by local governments on the assessed value of real estate for the purpose of funding schools, law enforcement, and other local services

n contrast, funds held in federally chartered credit unions are insured by

the NCUSIF .

effective rate of interest

the annual rate of return that is actually earned (or charged) during the period the funds are held (or borrowed)

loan-to-value ratio

the maximum percentage of the value of a property that the lender is willing to loan

closed-end lease

the most popular form of automobile lease; often called a walk-away lease, because at the end of its term the lessee simply turns in the car (assuming the preset mileage limit has not been exceeded and the car hasn't been abused)

Savings Association Insurance Fund (SAIF)

the part of the FDIC that insures holders of accounts in savings and loan associations

capitalized cost

the price of a car that is being leased OR The price of an asset being leased as specified in the lease agreement, which includes the negotiated cost of the vehicle and any applicable fees and taxes, is called

Prequalification

the process of arranging with a mortgage lender, in advance of buying a home, to obtain the amount of mortgage financing the lender deems affordable for the home buyer

nominal (stated) rate of interest

the promised rate of interest paid on a savings deposit or charged on a loan

residual value (salvage value)

the remaining value of a leased car at the end of the lease term.

Bank Insurance Fund (BIF)

the section of the FDIC that insures deposits at commercial banks and savings banks

sticker price

the vehicle is the popular name given to the manufacturer's suggested retail price (MSRP), which is posted on a sticker on the vehicle's window. From a negotiating perspective, this number is effectively worthless, since it has virtually nothing to do with the dealer's invoice cost for the vehicle.

negative amortization

when the principal balance on a mortgage loan increases because the monthly loan payment is lower than the amount of monthly interest being charged; some ARMs are subject to this undesirable condition.

NCUSIF

which is overseen and managed by the National Credit Union Administration, covers deposits held in federally chartered credit unions.

he interest earned on a savings deposit is a function of four variables

•The amount of money held on deposit (PV) •The method to be used in calculating interest—for example, simple versus compound interest •The interest rate applied to the amount on deposit •The frequency with which the account's interest is earned—for example, annually, semiannually, quarterly, monthly, or daily

Which of the following are the factors that should be considered when identifying appropriate savings vehicles?

•your attitudes toward risk •the length of time you can leave your money on deposit •the liquidity, convenience, and safety characteristics of the accounts being considered •the level of current and anticipated interest rates.