REAL ESTATE TERMS
What is a
SMALL
A fixed-rate mortgage is a financial product that has a constant interest rate for the life of the loan.
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.
Fixed-rate mortgage example
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SMALL CAP?
The interest rate for an adjustable-rate mortgage fluctuates over the course 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.
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
Borrowers commonly encounter two types of mortgages: the fixed-rate mortgage and the adjustable-rate mortgage.
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:
An adjustable-rate mortgage, or ARM, ties the interest rate to a margin that includes a stated index, such as the Libor or Treasury bill yield. It includes the index plus a spread. While the index changes, the spread remains the same.
The shareholder has the right to redeem her shares for a predetermined amount called a call price.
Callability:
FIXED-RATE
MORTGAGE?
$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
The fixed-rate mortgage has a multitude of term options that vary from 10 to 30 years. Regardless of your preferred length, the interest rate remains the same for the length of the mortgage. This makes the fixed-rate mortgage a popular choice for homeowners who prefer a stable, budget-friendly monthly payment.
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.
Jane is shopping for a home and doesn’t want her mortgage payment to fluctuate. She wants to purchase a $200,000 home,
with a down payment of
$10,000. A 30-year fixed-rate
mortgage, with an interest
rate of 5 percent, has a
monthly payment of
$1,019.96 (principle and
interest only). This portion
of her mortgage remains the
same over the entire life of the loan.
5/5 ARM
A 5/5 ARM features a fixed period for five years, with a change allowed every five years after that initial period.
2/28 ARM
In this form, a fixed rate remains in place for two years. Then, a floating rate (a rate that can adjust from time to time) occurs over the next 28 years.
The loan adjusts periodically based on the terms of the mortgage. Should interest rates increase, the borrower has to adjust his budget to accommodate the higher payment.
Since the principle and interest remain the same for a fixed-rate mortgage, it is ideal for borrowers on a budget who don’t want to contend with payment adjustments. However, should interest rates drop, borrowers cannot take advantage of the drop unless they refinance the mortgage.
If a borrower places the property tax and homeowner’s insurance payments in escrow the fixed-rate mortgage payment can increase. This is due to fluctuations in taxes and insurance, not the interest rate.
