Finance and Investment Chapter 1 Quiz

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

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.