Question

 

1. Define any 10 terms. Give examples where pertinent.

                   Fixed rates                                        net asset value (NAV)

                  Adjustable rates                                 amortization

                  PMI                                                 mortgage lien

                  Assets under management                   reconveyance

                  Secondary deed of trust                      first deed of trust

                  Mortgage back securities                     credit default swaps

Answer 1

(1) Net Asset Value- "Net asset value," or "NAV," of an investment company is the company's total assets minus its total liabilities. For example, if an investment company has securities and other assets worth $100 million and has liabilities of $10 million, the investment company's NAV will be $90 million. Because an investment company's assets and liabilities change daily, NAV will also change daily. NAV might be $90 million one day, $100 million the next, and $80 million the day after.

(2) Fixed Rate - A fixed rate is an interest rate that stays the same for the life of a loan, or for a portion of the loan term, depending on the loan agreement.

A loan with a fixed interest rate provides payment stability. Among the most common fixed-rate products are fixed-rate mortgages and personal loans.

Example- Taylor is ready to become a homeowner. He decides that he wants a 30-year fixed-rate mortgage because he plans to stay in the home for many years and he wants a consistent monthly payment — not one that could fluctuate with the market. Taylor borrows $200,000 at a fixed rate of 4 percent, resulting in a monthly payment of $955 per month. The day after he closes on his loan, mortgage rates shoot up. But Taylor isn’t worried, because his mortgage rate is fixed for the life of the loan.

(3) Adjusted Rates - an interest rate that can change over a period of time

It is generally used in terms of mortgages.An adjustable-rate mortgage (ARM) is a type of mortgage in which the interest rate applied on the outstanding balance varies throughout the life of the loan. ... After this initial period of time, the interest rate resets periodically, at yearly or even monthly intervals

For example, a 2/28 ARM features a fixed rate for two years followed by a floating rate for the remaining 28 years. In contrast, a 5/1 ARM boasts a fixed rate for five years, followed by a variable rate that adjusts every year (as indicated by the number one). Similarly, a 5/5 ARM starts with a fixed rate for five years and then adjusts every five years.

(4) Assets under Management -

Assets under management (AUM) is the total market value of the investments that a person or entity manages on behalf of clients. Assets under management definitions and formulas vary by company.

In the calculation of AUM, some financial institutions include bank deposits, mutual funds, and cash in their calculations. Others limit it to funds under discretionary management, where the investor assigns authority to the company to trade on his behalf.

For example, the SPDR S&P 500 ETF (SPY) is one of the largest equity exchange-traded funds on the market. An ETF is a fund that contains a number of stocks or securities that match or mirror an index, such as the S&P 500. The SPY has all 500 of the stocks in the S&P 500 index.

As of August 15, 2020, the SPY had assets under management of $300 billion with an average daily trading volume of 51 million shares. The high trading volume means liquidity is not a factor for investors when seeking to buy or sell their shares of the ETF.

(5) Secondary deed of trust - A homebuyer who doesn't have enough financing to purchase a property might need to get a second form of financing from a bank or even an individual. A second deed of trust simply secures secondary financing on a home. The home loan itself differs from a deed of trust, a written instrument used to secure the loan's repayment. The deed of trust ties indebtedness to a home's title, giving the lender the right to foreclose on the property if the loan isn't repaid on time.

(6) Mortgaged Back Securities -

A mortgage-backed security (MBS) is an investment similar to a bond that is made up of a bundle of home loans bought from the banks that issued them. Investors in MBS receive periodic payments similar to bond coupon payments.The MBS is a type of asset-backed security.

There are two common types of MBSs: pass-throughs and collateralized mortgage obligations (CMO).

Pass-Throughs

Pass-throughs are structured as trusts in which mortgage payments are collected and passed through to investors. They typically have stated maturities of five, 15, or 30 years. The life of a pass-through may be less than the stated maturity depending on the principal payments on the mortgages that make up the pass-through.

Collateralized Mortgage Obligations

CMOs consist of multiple pools of securities which are known as slices, or tranches. The tranches are given credit ratings which determine the rates that are returned to investors.

(7) Amortization - Amortization is an accounting technique used to periodically lower the book value of a loan or intangible asset over a set period of time. In relation to a loan, amortization focuses on spreading out loan payments over time. When applied to an asset, amortization is similar to depreciation.

The formula to calculate the monthly principal due on an amortized loan is as follows:

Principal Payment = Total Monthly Payment – (Outstanding Loan Balance * (Interest Rate / 12 Months))

Typically, the total monthly payment is specified when you take out a loan. However, if you are attempting to estimate or compare monthly payments based on a given set of factors, such as loan amount and interest rate, you may need to calculate the monthly payment as well. If you need to calculate the total monthly payment for any reason, the formula is as follows:

Total Monthly Payment = Loan Amount [ i (1+i) ^ n / ((1+i) ^ n) - 1) ]

where:

• i = monthly interest rate. You'll need to divide your annual interest rate by 12. For example, if your annual interest rate is 3%, your monthly interest rate will be .0025 (.03 annual interest rate / 12 months).
• n = number of payments over the loan’s lifetime. Multiply the number of years in your loan term by 12. For example, a 4-year car loan would have 48 payments (4 years * 12 months)

Amortization of Intangible Assets

Amortization can also refer to the amortization of intangibles. In this case, amortization is the process of expensing the cost of an intangible asset over the projected life of the asset. It measures the consumption of the value of an intangible asset, such as goodwill, a patent, or a copyright.

Amortization is calculated in a similar manner to depreciation, which is used for tangible assets, and depletion, which is used for natural resources.

When businesses amortize expenses over time, they help tie the cost of using an asset to the revenues it generates in the same accounting period, in accordance with generally accepted accounting principles (GAAP). For example, a company benefits from the use of a long-term asset over a number of years. Thus, it writes off the expense incrementally over the useful life of that asset.

(8) First Deed of Trust - This is a legal document that gives the lender the right to foreclose on a property when the owner is unable to make the mortgage payments. The loan is secured by real property, reducing the level of risk.

Benefits

• Higher rates of return with reduced risk
• Loan secured by a hard asset
• Shorter terms on the investment notes –depending on the term of the note

Some risks:

• Not insured by the FDIC
• Second trust deeds carry more risk.
• Title problems can interfere with returns.
• An accurate appraisal is the responsibility of the investor
• Lengthy process to recover investment if the owner declares bankruptcy

(9) Reconveyance -The transfer of real property that takes place when a mortgage is fully paid off and the land is returned to the owner free from the former debt.

in those states which use deeds of trust as a mortgage on real property to secure payment of a loan or other debt, the transfer of title by the trustee (which has been holding title to the real property) back to the borrower (on the written request of the borrower) when the secured debt is fully paid. Under the deed of trust the borrower transfers title in the real property to the trustee (often a title or escrow company) which holds it for the benefit of the lender (called "beneficiary"). The lender must surrender the promissory note to the trustee who cancels it and then reconveys title and records the reconveyance.

(10) Credit Default Swaps -

A credit default swap (CDS) is a financial derivative or contract that allows an investor to "swap" or offset his or her credit risk with that of another investor. For example, if a lender is worried that a borrower is going to default on a loan, the lender could use a CDS to offset or swap that risk. To swap the risk of default, the lender buys a CDS from another investor who agrees to reimburse the lender in the case the borrower defaults. Most CDS will require an ongoing premium payment to maintain the contract, which is like an insurance policy.

A credit default swap is the most common form of credit derivative and may involve municipal bonds, emerging market bonds, mortgage-backed securities or corporate bonds.