6.4 Loan Types and Loan Amortization
Three basic types of loans - correct answer 1. Pure discount loans
2. Interest-only loans
3. Amortized loans
Pure discount loans - correct answer Loan in which the borrower receives money
today and repays a single lump sum at some time in the future
- simplest type of loan
- common for short-term loans
Interest-only loans - correct answer Loan in which the borrower pays interest each
period and repays the entire principal amount at some point in the future
- if there is just one period, then it is the same as a pure discount loan
Amortized loans - correct answer Loan in which the lender may require the
borrower to repay parts of the loan amount over time
Amortizing the loan - correct answer The process of providing for a loan to be paid
off by making regular principal reductions
Ways to amortize a loan - correct answer - Have the borrower pay the interest each
period plus some fixed amount
- Have the borrower make a single fixed payment every period
Three basic types of loans - correct answer 1. Pure discount loans
2. Interest-only loans
3. Amortized loans
Pure discount loans - correct answer Loan in which the borrower receives money
today and repays a single lump sum at some time in the future
- simplest type of loan
- common for short-term loans
Interest-only loans - correct answer Loan in which the borrower pays interest each
period and repays the entire principal amount at some point in the future
- if there is just one period, then it is the same as a pure discount loan
Amortized loans - correct answer Loan in which the lender may require the
borrower to repay parts of the loan amount over time
Amortizing the loan - correct answer The process of providing for a loan to be paid
off by making regular principal reductions
Ways to amortize a loan - correct answer - Have the borrower pay the interest each
period plus some fixed amount
- Have the borrower make a single fixed payment every period
