Discounted Cash flow Valuation - LOAN TYPES AND LOAN AMORTIZATION

4 important questions on Discounted Cash flow Valuation - LOAN TYPES AND LOAN AMORTIZATION

There are 3 basic types of loans what are these?

-pure discount loans
-interest-only loans
-amortized loans

Working with these loans is a very straightforward application of the present value principles that we have already developed.

Explain 1 of the 3 loans: Pure Discount loans

The pure discount loan is the simplest form of loan. With such a loan the borrower receives money today, and repays a single lump sum at some time in the future.

A one-year, 10 per cent pure discount loan, for example, would require the borrower to repay £1.10 in one year for every pound borrowed today

Explain 1 of the 3 loans: Intrest-only loans:

A second type of loan repayment plan calls for the borrower to pay interest each period, and to repay the entire principal (the original loan amount) at some point in the future.

Notice that if there is just one period, a pure discount loan and an interest-only loan are the same thing.
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Explain 1 of the 3 loans: Amprtized loans:

amortized loan, with which the lender may require the borrower to repay parts of the loan amount over time.The process of providing for a loan to be paid off by making regular principal reductions is called amortizing the loan.

With a pure discount or interest-only loan the principal is repaid all at once.

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