CH2_2_Interst Rates & Repayment Structures
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Questions and Answers

Which type of loan allows the lender to forgo both Principal and Interest until the term date?

  • PIK (Payment-In-Kind) Loan (correct)
  • Amortized Loan
  • Secured Loan
  • Interest Only Loan

    • What has contributed to the significant expansion of property lending in the 21st century?

  • Increased loan amortization
  • High Interest rates
  • Prolonged periods of low Interest rates (correct)
  • Government intervention in the housing market

    • What is the nature of interest in a lending transaction?

  • It is a fee for processing the loan.
  • It refers to the principal amount loaned.
  • It is the purchase price of money.
  • It is a periodic payment for the use of money. (correct)

    • What is a characteristic of quasi Interest Only Loans?

    <p>They are often refinanced before significant amortization occurs.</p> Signup and view all the answers

    Which loan structure allows only interest to be paid periodically?

    <p>Interest Only Loans</p> Signup and view all the answers

    What impact do low Interest rates have on companies' profits?

    <p>They reduce Interest expenses, assisting the profit margin.</p> Signup and view all the answers

    Why do lenders prefer higher interest rates?

    <p>To maximize profit from loan transactions.</p> Signup and view all the answers

    What factor makes lenders vulnerable when loans are secured by the asset's value?

    <p>Fluctuating asset values based on market demand.</p> Signup and view all the answers

    What often happens to loans structured with amortization?

    <p>They are often refinanced before significant amortization occurs.</p> Signup and view all the answers

    What component lowers the outstanding loan balance in an Amortising Loan?

    <p>Principal repayments</p> Signup and view all the answers

    What historical trend is noted regarding loan growth and Interest rates?

    <p>Rising rates tend to halt loan growth.</p> Signup and view all the answers

    What best describes a Payment-in-Kind (PIK) Loan?

    <p>No payments are made until the loan matures.</p> Signup and view all the answers

    What effect does a high interest rate have on a borrower's tendency to seek a loan?

    <p>It decreases the likelihood of borrowing.</p> Signup and view all the answers

    Which loan structure combines both interest and principal in fixed payments?

    <p>Amortising Loans.</p> Signup and view all the answers

    What is a key reason that lenders may prefer Interest Only Loans over other structures?

    <p>They reduce the necessity to replace loans often.</p> Signup and view all the answers

    What impact can a prudent borrower have on a lender's operations?

    <p>Requires the lender to incur new borrower acquisition costs.</p> Signup and view all the answers

    What characteristic distinguishes Payment-in-Kind (PIK) Loans from other loan types?

    <p>They do not require any payments until the loan term ends.</p> Signup and view all the answers

    Which factor often reduces a borrower's willingness to seek loans according to interest rate dynamics?

    <p>Higher payments result from increased interest rates.</p> Signup and view all the answers

    How does inflation impact the interest rates set by lenders?

    <p>Inflation risk requires higher rates to maintain purchasing power.</p> Signup and view all the answers

    What is a likely consequence of the prolonged period of low interest rates on property lending?

    <p>A significant appreciation in property prices</p> Signup and view all the answers

    Why might companies with lower creditworthiness favor Payment-In-Kind (PIK) Loans?

    <p>They can postpone interest and principal payments until the term ends</p> Signup and view all the answers

    What does the term 'quasi Interest Only Loans' refer to?

    <p>Loans that are often refinanced before significant principal repayment</p> Signup and view all the answers

    How do rising interest rates typically impact loan growth?

    <p>They lead to a decline in new loan approvals</p> Signup and view all the answers

    What risk do lenders face when loans are secured solely by the value of an asset?

    <p>Potentially inflated asset values</p> Signup and view all the answers

    What impact does a low rate of loan amortization typically have on property buyers?

    <p>Lower periodic repayments making borrowing more accessible</p> Signup and view all the answers

    What advantage do companies experience from cheap and abundant lending?

    <p>Enhanced capacity for capital investments driving sales growth</p> Signup and view all the answers

    Study Notes

    Interest and Its Nature

    • Interest is a periodic payment for the use of borrowed money, similar to rent for property or wages for labor.
    • The interest rate compensates lenders for the risk of borrower default and potential loss from inflation.

    Loan Types and Structures

    • Interest Only Loans: Borrowers pay only interest periodically, repaying the principal at the loan's end.
    • Amortising Loans: Both interest and principal are paid in fixed periodic payments; principal repayment reduces the outstanding loan over time.
    • Payment-in-Kind (PIK) Loans: Neither interest nor principal is repaid until the loan term ends; typically used by companies with lower creditworthiness.

    Borrower and Lender Dynamics

    • Lenders prefer Interest Only Loans to avoid the risk of borrower repayment leading to new acquisition costs.
    • Amortising loans are advantageous for traditional home mortgages, providing a structured repayment system.
    • Lenders focus more on a borrower's ability to make periodic payments rather than the home's current value.
    • Low interest rates and reduced loan amortization have significantly expanded property lending and increased property prices since the early 21st century.
    • Many loans are refinanced before substantial amortization occurs, turning them into quasi Interest Only Loans.
    • Rising property prices compel borrowers to take larger loans, which is supported by lower repayment amounts due to low interest rates.

    Company Borrowing and Economic Impact

    • Companies benefit from low-interest lending, allowing for increased capital investment and potential sales growth.
    • Lower interest expenses can boost corporate profits, and firms can borrow cheaply to repurchase equity, enhancing share prices.
    • However, increased debt can pose challenges if economic conditions worsen.

    Interest Rate Effects

    • Recent increases in interest rates can severely impact loan growth, with historical trends indicating a strong relationship between rising rates and loan activity decline.

    Interest and Its Nature

    • Interest is a periodic payment for the use of borrowed money, similar to rent for property or wages for labor.
    • The interest rate compensates lenders for the risk of borrower default and potential loss from inflation.

    Loan Types and Structures

    • Interest Only Loans: Borrowers pay only interest periodically, repaying the principal at the loan's end.
    • Amortising Loans: Both interest and principal are paid in fixed periodic payments; principal repayment reduces the outstanding loan over time.
    • Payment-in-Kind (PIK) Loans: Neither interest nor principal is repaid until the loan term ends; typically used by companies with lower creditworthiness.

    Borrower and Lender Dynamics

    • Lenders prefer Interest Only Loans to avoid the risk of borrower repayment leading to new acquisition costs.
    • Amortising loans are advantageous for traditional home mortgages, providing a structured repayment system.
    • Lenders focus more on a borrower's ability to make periodic payments rather than the home's current value.
    • Low interest rates and reduced loan amortization have significantly expanded property lending and increased property prices since the early 21st century.
    • Many loans are refinanced before substantial amortization occurs, turning them into quasi Interest Only Loans.
    • Rising property prices compel borrowers to take larger loans, which is supported by lower repayment amounts due to low interest rates.

    Company Borrowing and Economic Impact

    • Companies benefit from low-interest lending, allowing for increased capital investment and potential sales growth.
    • Lower interest expenses can boost corporate profits, and firms can borrow cheaply to repurchase equity, enhancing share prices.
    • However, increased debt can pose challenges if economic conditions worsen.

    Interest Rate Effects

    • Recent increases in interest rates can severely impact loan growth, with historical trends indicating a strong relationship between rising rates and loan activity decline.

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    Description

    This quiz delves into the concept of interest as a periodic payment for the use of money, similar to how rent is paid for property and wages for labor. Explore the nuances of lending, borrowing, and the financial implications of interest in various financial transactions. Test your understanding of money contracts and their role in finance.

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