Test 2

Mortgage

A long-term loan for a home

Credit or the principle of the loan

This is the money the bank or other lender is willing to lend to a person.

Security

This is anything of value pledged by the borrower that the lender may sell or keep if the borrower does not repay the loan; something you have to promise to the bank if you don’t pay back your loan.

examples of security

house, car title, and stocks are…

Simple Interest Note

This is a document (or agreement) that states the terms and conditions of the loan.

cosigners

Bankers sometimes grant loans without security, but they require the signature of one or more other persons, called _________ who guarantee the loan will be repaid

Interest

The money the borrower pays to use the lender’s money.

Simple interest

This is based on the entire amount of the loan for the total period of the loan, a specific type of interest.

Time must be expressed in the same period as what?

Rate

Rate

The percentage of the loan that is paid in interest.

Banker’s Rule

Each month has 30 days and a year has 12 months and 360 days.

On the due date of a simple interest note the borrower must repay …

Principle and Interest

Discount Note

Type of simple interest loan where the interest is paid at the time the borrower receives the loan

Bank Discount

The interest charged in advance when using a discount note

Partial Payment

A payment that is less than the full amount owed and made prior to the due date.

United States Rule

Interest accrued (built up) since the start of the loan or last partial payment must be paid before the payment can be used to lower the loan amount.

Annual compounding interest (# of compounds in one year is…)

1

Semiannual Compounding interest (# in one year is…)

2

Quarterly compounding interest (# in one year is…)

4

Monthly compounding interest (# in one year is…)

12

examples of fixed investiments

savings account, CDs (certificate of deposit), government bonds. Set interest rates.

examples of variable investments

Stocks, mutual funds, commercial bonds. Varying interest rates/returns

Compound Interest

This type of interest is computed based on the previous balance in the account, including previous interest.

Fixed Installment loan

Loan on which you pay a specific monthly payment amount for a set number of payments

Examples of Fixed Installment Loans

Mortgage, Auto, Student Loans

Open-end installmet loan

Loan on which there is no specific amount due each month, but a required minimum. Example: Credit Cards.

Credit Cards are what type of loan?

Open-End Installment Loan

Finance Charge

Total amount of money (interest) the borrower must pay the lending institution (such as a bank or MasterCard); Fancy way to say interest with installment loans

Total Installment price

Sum of amount borrowed AND down payment AND finance charge (points too if it is a mortgage)

3 parts to APR Table

APR, number of payments, Finance Charge per $100 of loan.

Actuarial Method

Used to find the amount of interest saved if you pay off an installment loan early (kinda the partial payment version of Fixed installment loans). Also used to find the total amount to pay the loan off

How to round minimum payments on credit cards:

Always round up!

Current Balance on a Credit Card

This balance is found by adding charges and subtracting payments from the starting/previous balance on a credit card.

Unpaid/Previous Balance Method

With this method, the current balance is used to determine the interest for a credit card.

Average Daily Balance Method (AVDB)

With this method, the balance used to determine interest on a credit card is found by averaging the balance on each day of the month. This is considered a fairer and more accurate way of calculating credit card interest.

Finance Charge on a credit card

Same thing as interest; can be calculated using either the unpaid/previous balance method, average daily balance method, or is calculated for a minimum payment in a different manner.

Minimum Payment Equation

Min payment = interest (i=prt) + ~1% of the principle

Grace Period

Window of time where you aren’t charged interest on your principle, given you had no previous balance

How to calculate finance charge on a credit card

i=prt. The p value changes depending on which of the three methods you are using.