Shifting Gears - Shifting Gears We turn our attention now...

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Shifting Gears… We turn our attention now to loans . When money is borrowed, the borrower repays: Principal - the original loan amount borrowed. Interest - the amount the lender charges for borrowing the money. 1
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Loans There are three primary types of loans: Pure Discount – All principal and interest for the loan is repaid in a lump-sum. Interest Only – Only interest is paid until the principal is due in full at maturity. Amortizing – Calls for equal payments, which include principal and interest; this is the most common type of consumer loan. 2
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Pure Discount Loans A Pure Discount Loan is repaid in a lump sum. It is what we learned in the previous chapter. Say, you borrow $10,000 at 10% for three years. No payments are made until the loan matures. 3
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Interest Only Loans A firm borrows $4,500 today for four years at 6.5% on an interest-only basis. Payments are made annually. How much does the company pay throughout the loan term?
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