REAL ESTATE TERMS
What is
SMALL
Amortization is the process of paying off debt with regular payments made over time. The fixed payments cover both the principal and the interest on the account, with the interest charges becoming smaller and smaller over the payment schedule.
Deeper definition
At the most basic level, there are two kinds of stock: preferred and common. Preferred stock is rarer than common stock, generally comprising a small proportion of all shares. It’s often more expensive, and can come with a minimum purchase amount.
Amortization example
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SMALL CAP?
The payment schedule of the loan, or term, determines how quickly it amortizes each month, with payments divided into equal amounts over the life of the loan.
SHORT-TERM
CAPITAL GAINS
Profits made from selling assets owned for one year or less.
LONG-TERM
CAPITAL GAINS
Profits made from selling assets owned for more than one year.
Jeff bought a vacation home for $100,000 and used it as a rental property for five years before selling it for $150,000, giving him a capital gain of $50,000.
Since he owned the property for more than one year, he calculated his long-term capital gain based on his tax bracket.
Since his annual income placed him in the 15 percent tax bracket ($37,651 to $91,150 for a single person in 2016), he didn’t have to pay any taxes on the profit.
If Susan pays only the minimum payment of $20 per month, it will take her 11 months to pay off her balance.
EBITDA doesn’t need to be measured by the Securities and Exchange Commission’s accounting standards, the Generally Accepted Accounting Principles (GAAP), so it is not a required line item on a company’s financial statement. EBITDA has become much more common in recent years, although many firms list an adjusted EBITDA figure.
Teresa has a 30-year, fixed-rate mortgage on her new home in the amount of $700,000, meaning that, including interest, her monthly payment is $3,758. Her first payment this year is $2,917 against the interest and $841 against the principal, leaving her a balance of $699,159.
Before the proliferation of
inexpensive computer
technology, it had been very
difficult to create and price
complicated derivative contracts, but this problem was more or less solved by the 1990s, thanks also to the Black-Scholes equation. Mortgage-backed securities became very common investment products. Instead of using derivatives to effectively balance risk, institutional traders began buying them up as ways to create leverage and take on much more risk. When the U.S. housing market began to crumble in 2006 and 2007, MBS investments spread throughout the banking system began to rapidly lose value, precipitating the crisis.
MARKET CAP
VALUE
OUTSTANDING SHARES
SHARE PRICE
OF THE STOCK
When a company issues more shares, the price of an individual share falls. Anti-dilutive preferred stock allows investors to receive more shares of a stock than he original paid for in the event that his are worth less as a result of a dilution.
The measure can be calculated by taking a company’s net income and adding back interest expense, taxes, depreciation, and amortization. Alternatively, it can be calculated by taking a company’s operating profit — EBIT, or earnings before interest and taxes — and adding depreciation and amortization.
Susan opens a credit card with a $1,000 credit limit and an interest rate of 14.99.
She makes a purchase of $200.
Susan understands she will pay interest on the balance until she pays it off, but she decides to carry a revolving balance.
If Susan pays only the minimum payment of $20 per month, it will take her 11 months to pay off her balance.
If shares of Dynaco rise
above $150, the buyer of
the options wins and
Englebert is obligated to
sell 100 shares to the
holder for $150. But if they
never hit the strike price of $150, Englebert wins and gets to keep the $200 premium the buyer paid. If shares of Dynaco get closer to the strike price of $150, the buyer can resell the option and make a profit off his speculative bet, but if shares of Dynaco decline — widening the spread between the strike price and the underlying asset price — the price of the option falls.
$100 million
$2
$20 million
$10 million
– Minus
PRICE PER SHARE
EXPENSES
Equals =
$30 million
NET PROFIT
>$10B
When referring to mortgages, amortization happens every time a payment is made. The payment covers two parts: the interest and the principal, and if the payment is a fixed rate it will always be the same sum of these two parts. The interest rate is calculated as a percentage of what’s left of the principal and could be influenced by the borrower’s credit; the principal is the amount borrowed from the lender, and the principal less payments against it is called the balance.
x
=
$10 Billion
PRICE/SHARE
MARKET CAP VALUE
NOT A LARGE CAP COMPANY
OUTSTANDING SHARES
PRICE/SHARE
MARKET CAP VALUE
A LARGE CAP COMPANY
=
63,000,000
$200
$12.6 Billion
Convertible preferred stock can be exchanged for common stock, but not vice versa.
Convertibility:
Anti-dilution:
While borrowers pay more each month with a 15-year loan, they’ll end up paying less overall than they would if paying the same loan over 30 years.
The shareholder has the right to redeem her shares for a predetermined amount called a call price.
Callability:
TREASURY
INFLATION-PROTECTED
amortization?
$300M–$2B
MARKET CAP
VALUE
OUTSTANDING SHARES
SHARE PRICE
OF THE STOCK
Amortization also refers to the practice of spreading out business expenses over the course of years, as opposed to paying them off all at once. This allows the business to soften the blow of expenses by showing one large expense as a series of smaller ones over a period of time.
OUTSTANDING SHARES
PRICE/SHARE
MARKET CAP VALUE
A SMALL CAP COMPANY
=
30,000,000
$41
$1.23 Billion
In most mortgages, the amount paid each month in interest progressively decreases, while simultaneously the amount owed on the principal progressively increases, until payments against the principal are higher than those against interest. The rate at which the balance decreases is called an amortization schedule.
The yearly profits from TIPS are considered taxable income by the IRS, even if the TIPS aren’t redeemed. Given the tax implications of TIPS investments, many investors purchase TIPS through mutual funds or deferred retirement accounts.
The S&P 500 index is part of the S&P Global 1200 family of indexes. Other members of the S&P Global 1200 family of indexes include the S&P MidCap 400, which measures the performance of stocks based on 400 midsize companies, and the S&P SmallCap 600, which measures stock performance based on 600 small companies.
The following month, her interest payment has gone down just a little bit, to $2,913, while the principal payment has gone up, to $845, leaving her with a balance of $698,314.
At this point 10 years later, her interest payment is $2,367 and her principal payment is $1,385, after which her balance is $568,009. At the very end of her amortization schedule, 30 years later, her interest payment has dropped to just $16, but her payment against the principal, her last one, is $3,742. By the end of the term, she has paid $652,790 in interest.
