Final Exam Review Essay

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Pages: 11

Review Sheet for Final Exam

a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan. However, the word mortgage alone, in everyday usage, is most often used to mean mortgage loan.

—Thirty and 15 year most common maturities
Lower rate on 15 year mortgage
Fifteen year has higher payments; lower total interest expense

Finding the payment on a mortgage

Interest Owed
Balance to Principal
PVA = A (PVIFA, i=, n=)
Calculating the PVIFA:
[ 1 − (( 1 /( 1 + i ) o i

Constructing an amortization schedule
Amortization Schedule


n

))]

Beginning
Balance
50000.00
41477.18
32272.53
22331.51
11595.21

$50,000 loan at 8% for 5 years
2
3
(1) * 0.08

Payment
12522.82
12522.82
12522.82
12522.82
12522.82

Figuring out how much of the payment goes to principal versus interest
• STEP 1 o P/YR = 1 o N=5 o I%YR = 8 o PV = -$50,000 o PMT = $12,522.82
How much of the first payment goes toward principal and interest?

o 1 [INPUT]

o [SHIFT] AMORT o = 8522.82 to principal o = 4000.00 to interest o = 41,477.18 remaining balance
What percentage of the first 3 payments goes toward principal and interest? o Total of 3 payments: 3 x 12,522.82 = 37,568.57 o 1 [INPUT] o 3 [SHIFT] AMORT o = 27,668.49 to principal o (divided by 37,568.57 = 73.65%) o = 9899.98 to interest o (divided by 37,568.57= 26.35%)

When do you pay most of your interest? Principal?
• The interest is majorly paid in the beginning, and the principal is majorly paid in the end

Foreign Exchange Markets
The market for currency trading is the foreign exchange market.
The major participants are:
—Central banks
—Corporations
—Large commercial banks
—Dealers & Brokers

Direct and indirect quotations
• Direct (US $ equivalent): the amount of US $ you receive per 1 unit of foreign currency
• Indirect (Currency per US $): the amount of the foreign currency I receive for each US $ that I have
• The relationship between the two is that they both use the US currency as a basis for exchange Understand locational, triangular, and covered interest arbitrage
• Locational arbitrage o There is price discrepancy and I take advantage of that o Capitalizing on price discrepancy of 2 different banks
§ Bid price: the price dealer buys the currency
§ Ask price: the price dealer sells the currency o Locational arbitrage is possible when: o Ask price at one bank < Bid price at another bank
• Triangular arbitrage o Capitalizing on discrepancies on cross exchange rates o When is it possible?
§ Theoretical cross xchange rate is different from the quoted cross xchange rate o What is a cross exchange rate: The xchange rate between 2 currencies that can be inferred from their xchange rate with another common currency o To capitalize on the price discrepancy:
§ 1. Buy overvalued

§ 2. Convert to undervalued
§ 3. Reconvert to home currency (dollar)
(Covered Interest Arbitrage) CIA o investing over seas and covering or hedging position with a forward contract.
-not instant or risk less o To understand CIA we must understand: o Interest rate differentials:
§ Forward differentials: ((F-S)/S) * 360/n
§ where n is the number of days o Example:
§ US investor with $1,000,000
§ 1-year US interest rate = 6%
§ 1-year Mexican interest rate = 8%
§ Spot rate: 1 peso = $0.50
§ 1-year forward rate: 1 peso =$0.55
§ Convert dollars to pesos:
• $1,000,000/0.50 = 2,000,000 pesos
• Invest at 8 percent for 1 year
• 2,000,000* 1.08 = 2,160,000 pesos

Governments intervene in foreign exchange markets:
• To smooth exchange rates
• To execute objectives of the central banks
• To establish implicit boundaries

Direct versus indirect intervention
• Indirect Intervention: o raises interest rates and then a value of dollar changes
-less predictable
-not best way to…