Finance Chapter 6

amortized loan

a loan that has identical payments throughout the contract. payments are applied first towards reducing the interest balance and any remaining sum towards the principal balance. consequently, the proportion of each payment that pays interest decreases while the proportion applied to the principal increases throughout the loan

annuity

a finite stream of recurring payments that are paid or received at regular intervals, they are offered as ordinary, dues, and growing

annuity due

a finite stream of identical recurring payments whose payments occur at the beginning of each period, rent and lease payments are examples

closing costs

expenses such as origination fees, appraisal fees, title searches, surveys, recording fees, and more that parties incur in a real estate transaction. typically, these run 2% to 5% of the purchase price, and whether the buyer or seller pays them is negotiable

consistent

in TVM calculations involving the annuity formulae, you must define both the payment frequency and the periodic rate over the same unit of time. start with the payment, then determine the rate

exchange-traded fund (ETF)

a security that operates much like a mutual fund but can be bought and sold on a stock market just as company shares do. they can track a particular portfolio, commodity, or industry, to name a few. the SPDR S&P 500 (NSDQ: SPY) was the first one and remains very popular today

growing annuity

an annuity whose payments increase increase at a constant percentage each period forever

prowing perpetuity

a perpetuity whose payments increase by a constant percentage each period forever

lease

a contract that allows a party to temporarily rent an asset for a fixed period under a set of pre-specified conditions. it can differ from rent in the case of large capital assets because generally accepted accounting principles may require the lessor (renter) to book the asset and the lease on its balance sheet

level perpetuity or perpetuity

an infinite stream of regularly paid identical cash flows

loan amortization schedule

a payment-by-payment table that shows the beginning balance, interest, and principal paid per payment, and the resulting ending balance for an amortized loan, such as a mortgage or car loan

ordinary annuity

a finite stream of identical recurring payments whose payments occur at the end of each period. car loans and mortgages are examples. often, when people say “annuity,” this is what they mean