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
