Lecture03_student

Lecture03_student - Morecomplicatedcashflows...

Info iconThis preview shows pages 1–10. Sign up to view the full content.

View Full Document Right Arrow Icon
    More complicated cash flows Perpetuities and annuities Loan amortization
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Negative amortization loans Sometimes, loans are set up such that the  loan payment is not enough to pay the  previous period’s interest There are times when these loans can be  useful (if you can get one) Your job is cyclical in nature (at least to start with) E.g. construction work You are certain that you can get a better return  investing money than the interest rate on the loan
Background image of page 2
Why negative amortization loans  may be hard to find today Suppose that a 20% down payment is  required for a mortgage from a bank Also suppose that the lender defaults on the  loan Negative amortization loans are okay for the bank  if the bank can recoup the amount loaned out For simplicity, assume this only happens if the  bank can sell the house at least for the loan  amount
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Why negative amortization loans  may be hard to find today Assume that the value of the house remains  constant As the loan’s balance increases, the difference  between the value of the house and the amount of  the loan converges What if the value of the house is going down? The terms of the loan could be such that the  amount of the loan ends up  MORE  than the value  of the house 
Background image of page 4
Negative amortization loans: An example $80,000 loan on a house valued at $100,000 Stated annual interest rate is 6%,  compounded monthly 0.5% per month Minimum payment required per month is  0.3% of the loan Notice that the minimum payment (0.3%) is less  than the monthly interest rate (0.5%)
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Negative amortization loans: An example The first month’s interest $80,000   0.005 = $400 The first month’s minimum payment $80,000   0.003 = $240 The minimum payment adds $160 to  the principal after the first month New balance is $80,160
Background image of page 6
Negative amortization loans: An example The second month’s interest $80,160   0.005 = $400.80 The second month’s minimum payment $80,160   0.003 = $240.28 New balance after 2 months:  $80,320.52 Notice that the balance is increasing at an  increasing rate
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Negative amortization loans: A final thought Eventually, the bank must get its money back Two common options The remaining balance is due on a given date Negative amortization ends after a certain number  of years Often 3 to 7 years After 3-7 years, the loan is amortized to be repaid over  the remaining life of the loan
Background image of page 8
Moving on Last lecture Compound interest Discounting We will use these tools to help us  continue our analysis of complicated  offers to sell a building 
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 10
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 57

Lecture03_student - Morecomplicatedcashflows...

This preview shows document pages 1 - 10. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online