FINC 349 Lecture 14

These flashcards cover key concepts from Chapters 1 to 7 of the finance lecture, focusing primarily on mortgages, risk management, tax implications, and capital structures.

What are the primary types of mortgages the lecture focuses on?

Fixed rate mortgages and adjustable rate mortgages.

What kind of calculations should students practice for the midterm?

Excel spreadsheet formulas, present value, future value, and weighted average cost of capital.

Define a bullet loan in the context of mortgage structures.

A loan where the principal is paid back in full at the end of the term.

What is the primary difference between fixed rate and adjustable rate mortgages?

Fixed rate mortgages have a constant interest rate, while adjustable rate mortgages have a variable interest rate.

What does ‘technical default’ refer to?

Minor breaches in loan agreements, such as missing a payment.

What are the three types of defaults mentioned?

Technical default, default, and dissolution or bankruptcy.

What is an example of intrinsic value in finance?

The value derived from tax deductibility of mortgage interest.

Why is understanding risk and return crucial in finance?

It affects business decisions and financial performance.

What is the purpose of tax deductibility in property ownership?

To reduce taxable income by allowing deductions for property taxes, interest payments, and maintenance.

What defines a variable rate mortgage?

A mortgage where the interest rate can change based on market conditions.

Why do individuals prefer fixed rates when rates are low?

For predictability and to lock in lower payments before interest rates rise.

In the context of bond pricing, what happens when interest rates rise?

The price of the bond typically falls.

What does the yield curve structure indicate?

The relationship between interest rates of bonds of different maturities.

Why is capital structure important in financing decisions?

It determines the optimal mix of debt and equity for maximizing company value.

What key concept allows property owners to reduce their tax liabilities?

Tax deductibility of expenses related to property ownership.

When might someone favor an adjustable rate mortgage over a fixed?

When they believe interest rates will decrease, thus reducing future payments.

What aspect of financial knowledge is essential for navigating mergers and acquisitions?

Understanding weighted average cost of capital and risk-adjusted returns.