Lesson 1, Topic 1
In Progress

1.3. Use simple and compound interest to make sense of and define a variety of situations.

ryanrori December 23, 2020

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Outcomes range

Mortgage loans, hire purchase, present values, annuities and sinking funds

Mortgage loan

A loan to finance the purchase of real estate, usually with specified payment periods and interest rates. The borrower (mortgagor) gives the lender (mortgagee) a lien on the property as collateral for the loan. The mortgagor’s lien on the property expires when the mortgage is paid off in full.

Hire purchase

An instalment plan – A system of paying for something in which the buyer pays part of the cost immediately and then makes smaller regular payments until the debt is reduced to nothing. E.g. Something bought on hire purchase is usually more expensive because an interest charge is added to the original price.

Present value

The current value of one or more future cash payments, discounted at some appropriate interest rate.

Annuity

Definition 1

A contract sold by an insurance company designed to provide payments to the holder at specified intervals, usually after retirement. The holder is taxed only when they start taking distributions or if they withdraw funds from the account. All annuities are tax-deferred, meaning that the earnings from investments in these accounts grow tax-deferred until withdrawal. Annuity earnings are also tax-deferred so they cannot be withdrawn without penalty until a certain specified age. Fixed annuities guarantee a certain payment amount, while variable annuities do not, but do have the potential for greater returns. Both are relatively safe, low-yielding investments. An annuity has a death benefit equivalent to the higher of the current value of the annuity or the amount the buyer has paid into it. If the owner dies during the accumulation phase, his or her heirs will receive the accumulated amount in the annuity. This money is subject to ordinary income taxes in addition to estate taxes.

Definition 2

More generally, a series of payments of set size and frequency, often to a retired person.

Sinking fund

A fund into which a company sets aside money over time, in order to retire its preferred stock, bonds or debentures.