1. Mathematics of Real Estate Finance
Chapter 15
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2. Interest
• Rent—paid for the use of money
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3. Simple Interest
• Paid only on the amount of principal still owed
– Interest ceases on principal repaid
– Derived from I=PRT
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4. Add-On Interest
• Rent paid on the entire amount of principal
for the entire period
• Disregards any principal repaid
• Acts to almost double contract rate
• Derived from AIR=2IC/P (n+1)
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5. Nominal and Effective Rates of
interest
• Nominal rate of interest is contracted rate
• Effective rate of interest is the actual rate paid
by the borrower
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6. Compound Interest
• Interest paid on interest earned
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7. Compound Worth of an Annuity
• Calculating the future worth of a series of
regular deposits, each made at the beginning
of a period
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8. Time Value of Money
• Money not received until some time in the
future is worth less today
• Present worth of money
• Present worth of an annuity
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9. Payment Schedules
• Amortization—systematic repayment of a
debt
• Annual payments
• Monthly payments
• Loan constants
• Distribution of principal and interest
• Total interest costs
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10. Measuring Profitability
• Breakeven analysis
• Return on investment (ROI)
• Lender’s profitability calculations
• Investor’s profitability calculations
• Net present worth method
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11. Discounting Trust Deeds and
Mortgages
• Point—one percent of loan amount
• Discounts
– Rule-of-thumb method
– Discount cash flow method
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