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CFIN502- Cheat sheet- Chapters 12 to 15.docx

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Ryerson University
FIN 502
Joan Lobo

Chapter 12 CREDIT AND DEBT Consumer loan is almost invariably repayable in equal monthly Solvency- long run ability of the family to pay its debts Debt capacity- determined by our ability to make loan payments installments of blending principal and interest Consumer credit- borrow money to buy goods and services based on our current and expected cash flow Loan rate quoted as APR or as an EAR—depending on Overdraft protection- kind of unsecured line of credit Payday Liquidity- ability of a family to meet its debt service payments in applicable legislation EAR= (1+k ) m1m loans—Offers small for short periods Borrower writes a post- the short run Credit reporting agency do not evaluate your credit shoreThey dated cheque for the amount of the principal plus interest Assets VS cash flow- net assets we own both contribute to our record all relevant information in your file and make the Percentage allowed varies among the lenders; 30-50% of net pay ability to repay debt, direct correlation on our debt capacity information available to credit bureau members Two kinds of assets that we can buy with borrowed money; Assets Risk- related to our credit history, variations in our future cash What kinds of credit cards are best?- Annual fee - Grade periods or for consumption purposes and Assets for investment purposes-> flows and the fact that assets vary over time the free loan period - Interest rate charged on the unpaid balance assets generally increase in value over time and generate cash flow TDS of 40%: total debt service ratio= [annual mortgage and how it is calculated - Additional features—free like insurance, in future payments+ property taxes+ 50% annual condos fees +other debt air mileage entitlement, cash machine linkage, amount of credit Consumer loans—decrease your net worth over time obligations]/ gross family income available Investment debt—increase your net worth GDS of 30%: Gross debt service= [PIT +50% of condo fees]/annual Unsecured personal credit line- maximum amount that you can If you borrow money to invest the interest expense is tax gross income owe at any point in time Function of the prime rate (prime rate deductible—pay less income tax whereas if you borrow money to Home equity credit line- equity on your home can be used as plus 3%)Repayment is set up on a monthly installment basis— consume the interest expense are not tax deducible collateral to secure a line of credit maximum credit lines at 75% normally repaid in 2-5 years Advantage— provides higher credit Pay cash for consumption and borrow money for investments of the market value of their home limit at a lower rate of interest than D/E ratio: (1+x)k-xi=r r=return, x=D/E ratio, k=expected return Chapter 13MORTAGAGE Foreclosure- remedial court action taken by a mortgagee, when Direct market comparison approach (DMC)- comparing prices at Mortgage- the transfer of interest in property to a creditor as default occurs on a mortgage, to cause forfeiture of the equity of which similar properties have been sold must have data security for payment of a debt with a right o redemption by the redemption of the mortgager Cost approach- price of home on cost of land + cost of producing borrower upon repayment of the debt Power of sale- right of a mortgagee, to force sale of the property the home – accrued depreciation on home Equity of redemption- right to reclaim title from the lender should default occur Warranty- purchases is conditional on certain conditions being met First mortgage- mortgage where the conveyance of title is involved Elements in a mortgagePrincipal, term, rate of interest and the Types of mortgages Second mortgage-conveys the right to a further equity of compounding frequency, period of p12ment, amor2ization period Fixed rate- security of knowing your interest rate wont change redemption which can again be mortgaged Effectively monthly rate(1+m) = [1+k/2] Closed variable interest rate- fixed term and allows mortgage to Principal- amount of money that is being borrowed Calculate—semi annual rate, add 1, take root (12,24,26,52), take advantage of interest rate fluctuations Interest- price paid by the borrower to the lender for the use of the subtract 1, multiply 100 Open variable interest rate-flexibility of fixed payments, security lenders money of being able to lock into a fixed rate at anytime, pay off all or part Amortization period- time period required to retire completely a  Outstanding principal or outstanding balance of the loan is of mortgage without penalty debt through scheduled repayments of principal equal to the present value of the remaining stream of mortgage No down payment- need enough money for closing costs, Blended payments- periodic repayments are constant and each payments financing costs are high and negative equity could result if real payment includes interest and repayment of part of the principal Change in mortgage rateRate of interest is guaranteed and fixed estate price drops Term- actual length of time for which the money is loaned at a only for the term of the mortgageEnd of term—mortgage must particular rate of interest be renewed or refinanced at the rate of interest that applies at the Maturity date- final date in the term of the mortgage is called time compute PV of loan using amort period renewal rate maturity date Max annual payments= (GDS X salary)- prop tax Conventional mortgage- describe a first mortgage granted by an GDS rule—your monthly mortgage payment plus property taxes institutional lender, where amount of loan does not exceed 75% of must be less than a certain percentage of your monthly gross the appraised lending value of the property income High ratio mortgage- mortgage that exceeds 75% of lending value Principal residence- potential capital gain and must be insured Imputed rental income- invest in a home, you save on he rental Default- failure to meet the obligations imposed by the debt expenses you would otherwise have to pay Chapter 14INVESTING Using the standard deviation as a measure of risk—we see that Portfolio- collection of securities so it is diversified in more than Important characteristicsReturn, risk, liquidity, marketability, stocks are the riskiest, long term bonds are less risky and one assets term, management, tax considerations, divisibility government treasury bills are the least riskyBigger the standard Relationship between the returns on any 2 investments is expressed Rate of return (r) or holding period return (HPR) deviation he greater risk of the investment by the correlation coefficientMeasures extent to which 2 r (or HPR)= P -P1+D0 P 0 Beta- measures the co-movement of the stocks return with the sequences of numbers move together Realized rate of return- rate of return that has actually occurred in stock markets return Correlation coefficient can range from -1 to +1Usually greater a past period Measures the risk of the investment relative to the risk of the than zero for returns on investments Expected rate of return- return that is expected to happen in the market Higher the beta—more sensitive the stock moves in the Correlation coefficient of zero—two investments are uncorrelated future
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