Review Vocabulary

Add-on loan A loan in which the borrower receives the principal, the interest is calculated in advance as simple interest, and the borrower pays back the principal plus interest in equal installments. (p. 927)

Adjustable-rate mortgage (ARM) A loan whose interest rate can vary during the course of the loan. (p. 921)

Amortization payment formula The formula for installment loans that relates the principal , the interest rate per compounding period, the payment at the end of each period, and the number of compounding periods needed to pay off the loan:

(p. 916)

Amortize To repay in regular installments. (p. 912)

Annual percentage rate (APR) The number of compounding periods per year times the rate of interest per compounding period. (p. 913)

Annuity A sequence of periodic payments. (p. 929)

Annuity-certain A specified number of equal periodic payments. (p. 931)

Compound interest formula The formula for the amount in an account that pays compound interest periodically. For an initial principal and effective rate per compounding period, the amount after compounding periods is . (p. 911)

Compounding period The fundamental interval for compounding, within which no compounding is done. Also called simply period. (p. 913)

Conventional loan A loan in which each payment pays all the current interest and also repays part of the principal. (p. 914)

Discounted loan A loan in which the borrower receives the principal minus the interest but must pay back the entire principal, usually with equal payments. (p. 923)

Effective annual rate (EAR) The effective rate per year. (p. 913)

Effective rate The actual percentage rate, taking into account compounding. (p. 913)

Equity The amount of principal of a loan that has been repaid. (p. 919)

Interest Money charged for a loan. (p. 910)

Interest rate factor The annual interest rate divided by the number of days in a year, taken to be 365.25. (p. 910)

Life annuity An annuity with regular payments for as long as you live. (p. 931)

Nominal rate A stated rate of interest for a specified length of time; a nominal rate does not take into account any compounding. (p. 912)

Points (on a mortgage) Payments up front to secure a lower interest rate; one point equals 1% of the principal. (p. 926)

Principal Amount borrowed. (p. 910)

Savings formula The formula for the amount in an account to which a regular deposit is made (equal for each period) and interest is credited, both at the end of each period. For a regular deposit of d and an interest rate per compounding period, the amount accumulated is

(p. 915)

Simple interest The method of paying interest on only the initial balance in an account and not on any accrued interest. For a principal , an interest rate per year, and years, the interest is . (p. 910)