Chapter 11: Consumer Mathematics 3

A cosigner is a person other than the borrower who agrees to guarantee the repayment of a loan. This means that if the borrower fails to make the required payments, the cosigner is legally responsible for repaying the loan. The cosigner's presence provides additional security to the lender, as they have someone else to turn to for repayment if the borrower defaults.

A ratio of some number to 100 is commonly referred to as a percent. Percentages are used to express a proportion or a fraction out of 100. It is a way of representing a part of a whole in terms of 100 equal parts. Percentages are widely used in various fields such as finance, statistics, and everyday life to compare and analyze data.

Banker's Rule is a guideline used in financial calculations where the year is considered to have 360 days instead of the actual 365 or 366 days. This rule simplifies interest calculations and is commonly used by banks and financial institutions. It assumes that each month has 30 days, making it easier to calculate interest for various time periods. This rule is particularly useful for fixed investment calculations, where the principal amount and interest rates are fixed for a specific period of time.

The term "point" refers to a fee that is equal to 1% of the loan amount. It is typically charged by lenders in exchange for a lower interest rate on the mortgage. This means that if the loan amount is $100,000, one point would be $1,000. Paying points upfront can help reduce the overall interest paid over the life of the loan.

The correct answer explains that simple interest is calculated by multiplying the principal amount by the interest rate and the time period. This formula allows for the determination of the amount of interest that will be earned or paid on a loan or investment. It is a straightforward method of calculating interest and does not take into account compounding or other factors.

A mortgage is a long-term loan that is commonly used to purchase a house. It is a financial arrangement where the borrower obtains funds from a lender to buy a property, and the property itself serves as collateral for the loan. The borrower then repays the loan over a specified period of time, typically with interest. Mortgages are a popular form of financing for homebuyers, as they allow individuals to afford a home purchase by spreading out the payments over many years.

Equity refers to the difference between the appraised value of a home and the principal balance remaining on the mortgage. It represents the portion of the property that the homeowner truly owns, free from any debts or liabilities. When the appraised value of the home increases or the mortgage balance decreases, the equity also increases. It is an important measure of the homeowner's financial stake in the property and can be used for various purposes such as borrowing against the home or selling it for profit.

A fixed investment is a type of investment where the principal amount is guaranteed, meaning that the initial investment will not be at risk. Additionally, the interest earned on the investment is calculated at a fixed rate, meaning that the rate of return will not change over the investment period. This provides investors with a sense of security and stability as they can rely on a guaranteed return on their investment.

The US rule refers to a legal principle established by the US Supreme Court that outlines how partial payments are to be applied to a loan. This rule provides guidance on how lenders should allocate and apply payments made by borrowers towards the outstanding balance of a loan. It ensures that partial payments are applied in a fair and consistent manner, typically prioritizing interest payments before reducing the principal amount owed. The US rule is an important aspect of loan repayment and helps to clarify the process for both borrowers and lenders.

An ARM (Adjustable Rate Mortgage) is a type of mortgage where the interest rate can change over time. Unlike a fixed-rate mortgage, the interest rate on an ARM is typically fixed for an initial period and then adjusts periodically based on a specific index. This means that the monthly mortgage payment can fluctuate, potentially increasing or decreasing depending on the movements of the index. ARM loans are often attractive to borrowers who expect to sell or refinance their homes before the initial fixed-rate period ends, or those who believe that interest rates will decrease in the future.

An amortization schedule is a list or table that provides detailed information about the payments made towards a loan. It includes the payment number, the amount paid towards the principal (the initial loan amount), and the amount paid towards interest. This schedule helps borrowers understand how their payments are allocated between reducing the principal amount and covering the interest charges over the course of the loan repayment period.

APR stands for Annual Percentage Rate, which is the true rate of interest charged for a loan. It includes not only the interest rate but also any additional fees or costs associated with the loan. This allows borrowers to compare different loan options and understand the total cost of borrowing. The APR is expressed as a percentage and represents the yearly cost of the loan over its term. It is an important factor to consider when taking out a loan as it helps borrowers make informed decisions and understand the overall cost of borrowing.

The Total Installment price refers to the overall cost of a purchase, including both the monthly payments and the down payment. It encompasses all the expenses associated with the purchase, such as closing costs and finance charges. Therefore, it is the correct answer as it includes all the necessary components to determine the total cost of the purchase.

Investment refers to the act of allocating money or resources with the expectation of generating income or profit in the future. It involves purchasing assets such as stocks, bonds, real estate, or businesses, with the goal of earning a return on the invested capital. The use of capital for income or profit aligns with the concept of investment, as it implies the intention to utilize financial resources in a way that will yield financial gains. The other options, Banker's Rule and Mortgage, do not directly relate to the use of capital for income or profit.

Credit refers to the money that a bank or financial institution is willing to lend to an individual or business. It represents the trust and confidence that the lender has in the borrower's ability to repay the borrowed amount. Credit can be in the form of loans, credit cards, or lines of credit, and it allows individuals and businesses to make purchases or investments without having to pay the full amount upfront. The borrower is expected to repay the borrowed funds, usually with interest, within a specified period of time.

The unpaid balance method is a method of charging interest on a credit card where interest is only calculated and paid on the previous outstanding balance. This means that if the cardholder pays off their balance in full each month, they will not incur any interest charges. This method is beneficial for cardholders who are able to pay off their balances regularly, as it allows them to avoid accruing unnecessary interest charges.

Compound interest is the correct answer because it is the type of interest that allows the interest to earn interest. In compound interest, the interest is added to the principal amount and then the interest is calculated based on the new total. This process is repeated over multiple periods, resulting in the interest earning interest. This makes compound interest more beneficial compared to simple interest, where the interest is only calculated on the principal amount.

The correct answer is "Security." In the context of borrowing and lending, security refers to the collateral that the borrower pledges to the lender. This collateral serves as a guarantee for the lender that they can sell or keep the pledged asset if the borrower fails to repay the loan. It provides a level of protection for the lender against potential default by the borrower.

An open-end installment loan is the most common type of loan associated with a credit card. This type of loan allows the borrower to make purchases and pay them off over time with monthly installments. Unlike a closed-end installment loan, which has a fixed term and repayment schedule, an open-end installment loan does not have a predetermined end date. Instead, the borrower can continue to make purchases and payments as long as they stay within their credit limit. This flexibility is what makes it the most common type of loan associated with credit cards.

The actuarial method is the primary method used to compute unearned interest on an installment loan. This method takes into account the time value of money and calculates the unearned interest based on the remaining principal balance and the interest rate. It is a more accurate and precise method compared to the unpaid balance method or the average daily balance method. The actuarial method considers the specific terms and schedule of the loan to determine the unearned interest amount.

A down payment is the amount of cash that a buyer must prepay on an item in order to receive a loan or mortgage. This payment is typically a percentage of the total purchase price and is made upfront before the loan or mortgage is granted. It serves as a form of security for the lender, reducing the risk of default by the buyer. The down payment also helps to lower the loan amount, resulting in lower monthly payments for the buyer.

APY stands for Annual Percentage Yield, which is a measure of the total amount of interest earned on an investment over a year, taking into account compounding. It is the correct answer because it aligns with the given statement, which mentions "the same period of time as a compound rate." APY reflects the actual interest earned, including the effect of compounding, making it a more accurate measure of the return on investment compared to the simple interest rate. ARM refers to Adjustable Rate Mortgage, and APR stands for Annual Percentage Rate, which are not relevant to the given statement.

Bank discount refers to the interest charged in advance on a discount note. When a discount note is issued, the bank deducts the interest from the face value of the note and pays the borrower the discounted amount. The interest charged is the bank discount. This is a common practice in financial institutions where borrowers receive less than the face value of the note upfront, and the difference between the face value and the discounted amount represents the interest charged by the bank.

A variable investment refers to a type of investment where the investor has a chance of losing money. Unlike fixed investments, which offer a guaranteed return, variable investments are subject to market fluctuations and can result in losses. This could include investments in stocks, where the value of the stocks can go up or down, leading to potential gains or losses for the investor.

The principal refers to the initial amount of money deposited into an account or borrowed from a lender. It is the base amount on which interest or finance charges are calculated. In the context of finance, the principal is a crucial element as it determines the total amount to be repaid or earned.

A finance charge refers to the total amount of money that a borrower is required to pay in order to use a lender's money. This charge includes any interest, fees, or other costs associated with borrowing money. It is an additional cost that is added to the principal amount borrowed and is typically expressed as a percentage of the loan amount. The finance charge is important for borrowers to consider when evaluating the overall cost of borrowing and determining the affordability of a loan.

Interest refers to the money that is paid by the borrower for the use of the lender's money. It is an additional amount charged on top of the principal amount borrowed. The lender charges interest as a form of compensation for lending the money and as a way to make a profit. The amount of interest paid depends on factors such as the interest rate, the duration of the loan, and the principal amount.

The Arg.Daily Bal. Method is the best method of charging interest on a credit card for the consumer. This method calculates the interest based on the average daily balance of the credit card over the billing cycle. This means that any payments made towards the balance are immediately deducted, reducing the amount on which interest is charged. This method is more favorable for consumers as it minimizes the amount of interest they have to pay compared to other methods like the Finance Charge or Closing Costs.

Closing costs refer to the expenses that a borrower has to pay when finalizing a mortgage or loan. These costs are separate from the down payment and include various fees such as attorney fees, survey costs, appraisal fees, and other charges associated with the loan process. These expenses are typically paid at the closing of the loan and can vary depending on the lender and the specific terms of the mortgage. Closing costs are an important factor to consider when budgeting for a mortgage, as they can significantly impact the overall cost of acquiring the loan.

A discount note is a type of loan where the interest is paid upfront at the time the borrower receives the loan. This means that the borrower receives the loan amount minus the interest that would have been paid over the loan term. The interest is deducted from the loan amount, resulting in the borrower receiving a discounted loan. This type of loan is commonly used in short-term financing or for individuals who need immediate cash flow.