Consumption and Mortgage Calculations Quiz

Choose a study mode

Play Quiz
Study Flashcards
Spaced Repetition
Chat to Lesson

Podcast

Play an AI-generated podcast conversation about this lesson
Download our mobile app to listen on the go
Get App

Questions and Answers

Match the investors with their investment strategies:

Investor A = Invest in the real opportunity to maximize t=1 consumption Investor B = Consume the entire income at t=0 Both Investors = Have an income of $200,000 today

Match the terms with their definitions in the context of the consumption model:

NPV Rule = Advice to accept investments that increase wealth t=0 = Current period of consumption t=1 = Future period of consumption Investment Opportunity = Cost of $200,000 with a return of $215,000

Match the loan components with their characteristics:

Down Payment = 20% of the house's value Total House Value = $2 million Annual Interest Rate = 6% with monthly compounding Mortgage Duration = 25 years

Match the concepts with their effects on mortgage principal repayment:

<p>First Year Payment = Percentage of principal repayment is low Subsequent Years Payment = Percentage of principal repayment increases Fixed Monthly Payments = Remain constant throughout the loan duration Interest Payment = Higher in the initial years of the loan</p> Signup and view all the answers

Match the investment characteristics with the corresponding investor preference:

<p>Patient Investor = Prefers to wait for future consumption Impatient Investor = Wants immediate consumption Real Investment Opportunity = Returns $215,000 at t=1 Risk-free Loan Access = Available to both investors</p> Signup and view all the answers

Flashcards

Two-period consumption model

A model that analyzes investment and consumption decisions over two periods (now and next year).

Investor A (patient)

Investor who prefers future consumption and will prioritize investing to maximize future earnings.

Investor B (impatient)

Investor who prefers current consumption and will prioritize maximizing current earnings.

Investment opportunity (real)

A project that requires an upfront cost but yields a potentially greater profit.

Signup and view all the flashcards

Risk-free borrowing/lending

Loans or investments with no risk of default.

Signup and view all the flashcards

Net Present Value (NPV)

The difference between the present value of future cash inflows and the present value of future cash outflows.

Signup and view all the flashcards

Mortgage

A loan used to finance the purchase of a house or other real estate, repaid through regular payments.

Signup and view all the flashcards

Down payment

The initial payment made to purchase an asset, often a portion of the total cost.

Signup and view all the flashcards

Monthly compounding

Calculating interest on a loan or investment by multiplying the principal (balance) periodically, at the end of each month.

Signup and view all the flashcards

Loan principal repayment

The portion of each mortgage payment that goes toward reducing the total amount of the loan (the debt).

Signup and view all the flashcards

Study Notes

Consumption Model

  • Two-period model: now (t=0) and next year (t=1)
  • Two investors:
    • Investor A: patient, wants to consume max at t=1
    • Investor B: impatient, wants to consume max now
  • Both have $200,000 income today, no income next year
  • Access to investment opportunity: $200,000 now, returns $215,000 at t=1
  • Risk-free borrowing/lending at 10% annual rate
  • Investment and consumption decisions, cash flows, and NPV rule explained for each investor

Mortgage Calculation

  • Sydney house purchased for $2 million
  • 20% down payment, $400,000
  • 25-year mortgage for remaining $1.6 million
  • Fixed monthly payments, first payment due next month
  • 6% annual interest rate, monthly compounding
  • Calculate principal repayment in the first year as a percentage of total annual mortgage payment
  • Determine whether this percentage will increase, decrease, or remain constant in subsequent years and explain why.

Studying That Suits You

Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

Quiz Team

Related Documents

Previous Exam PDF

More Like This

Use Quizgecko on...
Browser
Open
Browser
Browser