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Questions and Answers
Interest is a lender's primary return on an investment.
Interest is a lender's primary return on an investment.
True
A lender will make a loan even if it appears to be an unprofitable investment.
A lender will make a loan even if it appears to be an unprofitable investment.
False
Return on investment refers to the recapturing of the amount originally invested.
Return on investment refers to the recapturing of the amount originally invested.
False
Debt investments generate interest income.
Debt investments generate interest income.
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A liquid asset is very difficult to convert into cash quickly.
A liquid asset is very difficult to convert into cash quickly.
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What is the term used to describe the process of converting an asset into cash quickly?
What is the term used to describe the process of converting an asset into cash quickly?
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What is the term used to describe the mix of investments an individual holds?
What is the term used to describe the mix of investments an individual holds?
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What does the term "refinancing" refer to?
What does the term "refinancing" refer to?
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Which of the following is categorized as a debt investment?
Which of the following is categorized as a debt investment?
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What does the term of a loan typically refer to?
What does the term of a loan typically refer to?
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What does a bond purchaser typically pay?
What does a bond purchaser typically pay?
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What type of investment is a rental property considered?
What type of investment is a rental property considered?
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What is the primary expectation of an investor supplying capital?
What is the primary expectation of an investor supplying capital?
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What characterizes a liquid asset?
What characterizes a liquid asset?
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Which regulatory body oversees the issuance and trading of securities?
Which regulatory body oversees the issuance and trading of securities?
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What is the primary characteristic of a debt investment?
What is the primary characteristic of a debt investment?
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Which of the following is an example of an ownership investment?
Which of the following is an example of an ownership investment?
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Return on investment refers to what?
Return on investment refers to what?
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Which of the following best defines 'return of investment'?
Which of the following best defines 'return of investment'?
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What financial returns does corporate stock provide to stockholders?
What financial returns does corporate stock provide to stockholders?
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Study Notes
Learning Objectives
- Students should identify key characteristics of any investment
- Students should explain how homebuyers use loans for home purchases and how investment principles affect residential financing
- Students should list investment types (ownership, debt, securities)
- Students should distinguish between investment features and benefits of each type
- Students should discuss how investment characteristics (safety, liquidity, yield) interact to affect risk
- Students should discuss diversification and its effect on risk
- Students should describe mortgage lender risks (default, loss, interest rate, prepayment)
- Students should summarize how market interest rates affect mortgage lending
Suggested Lesson Plan
- Overview of Chapter 1 ("Finance and Investment"), reviewing learning objectives
- Lesson content presentation:
- Borrowing money to buy a home
- Mortgage financing and affordability
How Mortgage Financing Works
- Loans as investments
- Investments and Returns
- Investment capital
- Return on investment vs. return of investment
- Types of Investments
- Ownership investments
- Debt investments
- Securities
- Investment Risk
- Safety, liquidity, and yield
- Diversification
- Lending risks
- Misjudging risk
- Lending Risks
- Market Interest Rates
- Factors affecting mortgage rates
- How interest rates affect real estate activity
Chapter 1 Outline:
- Borrowing money to buy a home
- Buyer's ability to afford a home depends partially on mortgage financing availability
- Principal refers to the remaining amount owed, while interest is the borrowing cost.
- From lender's perspective, a loan is an investment
- Interest is the lender's primary return
- Lender will only approve a loan if profitable given economic conditions
Investments and Returns
- Investment capital is accumulated wealth used to fund enterprises and transactions
- Investors expect returns from their investments
- Return on investment is profit above the initial investment
- Return of investment is recapturing the original investment (breaking-even)
Types of Investments
- Ownership investments:
- Example: buying real estate
- Generate net income, dividends or appreciation
- Gaining a property interest
- Example: real estate, stocks
- Debt investments:
- Investor provides money that's repaid with interest
- Examples: loans, bonds, savings accounts
- Securities:
- May be ownership or debt investments
- Examples: stocks, bonds, mortgage-backed securities
- Designed to be liquid investments
Investment Risk
- Safety: low risk of losing invested capital
- Liquidity: how easily converted to cash
- Yield: rate of return
- Diversification: Investment in various assets to reduce risk of loss
Lending Risks
- Risk of default: borrower not repaying
- Risk of loss: foreclosure proceeds don't cover loan amount
- Interest rate risk: market rates rise while loans are at a lower rate
- Prepayment risk: loan repaid before expected
Market Interest Rates
- Typical rates for loans
- Factors impacting mortgage interest rates (loan size, fixed vs. adjustable, length, borrower's credit)
- Real estate activity increases with low mortgage rates
Chapter 1 Quiz
- Questions covering the concepts in the chapter
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Description
Test your understanding of key concepts from Chapter 1 on Finance and Investment. This quiz covers crucial topics like investment characteristics, mortgage financing, and the interaction of risk and return. Prepare to assess your knowledge of how homebuyers use loans and the different types of investments available.
