Yield Maintenance

Yield Maintenance = Present Value of Remaining Payments on the Loan x (Interest Rate - Treasury Yield)

    graph TD;
	    A[Loan Amount] --> B[Remaining Payments]
	    B --> C[Interest Rate]
	    B --> D[Treasury Yield]
	    C --> E[Yield Maintenance Premium]
	    D --> E

## What is the purpose of yield maintenance? - [x] To compensate lenders for lost interest due to early loan repayment - [ ] To reward borrowers for paying off loans early - [ ] To calculate real estate taxation - [ ] To promote borrowing more money > **Explanation:** Yield maintenance is designed to ensure lenders receive expected returns by compensating for any interest lost from loans paid off early. ## What would a higher Treasury yield imply for yield maintenance? - [x] A higher yield maintenance fee - [ ] A lower yield maintenance fee - [ ] No change at all - [ ] A completely new cup of coffee > **Explanation:** If Treasury yields increase, borrowers must pay a higher yield maintenance fee to cover the difference in interest rates to account for lost investor returns. ## When might a borrower encounter yield maintenance? - [x] When they pay off their loan before maturity - [ ] When they apply for a new loan - [ ] When they change their mortgage type - [ ] When they throw a loan party > **Explanation:** Yield maintenance comes into play when a borrower decides to settle their loan obligations early. Throwing parties won’t make those fees go away! ## Can yield maintenance be negotiated? - [x] Sometimes, depending on the agreement - [ ] Never, it's always fixed - [ ] Only if the lender is doing a happy dance - [ ] Only for loans under $500 > **Explanation:** Depending on the lender and the specific loan agreement, there might be some room for discussion on yield maintenance premiums. ## What does yield maintenance discourage? - [x] Early payoff of loans - [ ] Late payments - [ ] Application fees - [ ] Home renovations > **Explanation:** It’s put in place particularly to discourage borrowers from withdrawing their financial commitments ahead of schedule due to uncertain future rates! ## Yield maintenance is primarily applied to what type of financial products? - [x] Loans and bonds - [ ] Insurance policies - [ ] Stock options - [ ] Cash deposits > **Explanation:** Yield maintenance is commonly associated with loans and bonds, primarily benefiting lenders and distributors of such financial products. ## What's a common reason lenders are motivated to implement yield maintenance? - [x] Preventing interest rate discrepancies - [ ] Increasing borrower interest - [ ] Changing market trends only - [ ] They love the sound of coins! > **Explanation:** Lenders implement yield maintenance to prevent losses from fluctuating interest rates caused by early loan payoffs. ## What significance does the calculation of yield maintenance serve? - [x] Financial security for lenders - [ ] Fun math homework - [ ] An excuse for borrowing more - [ ] Making lawyers happy > **Explanation:** The calculation is significant since it provides financial security for lenders while ensuring they are compensated appropriately when loans are prematurely paid off. ## What should borrowers do before getting a loan? - [x] Understand the yield maintenance terms - [ ] Buy a new car - [ ] Watch all the "Hunger Games" movies - [ ] Eat three slices of cake > **Explanation:** Knowing the yield maintenance terms is crucial before signing a loan agreement to avoid any nasty financial surprises later! ## Yield maintenance primarily protects which party in the loan agreement? - [x] The lender - [ ] The borrower - [ ] The dog sitting by your feet - [ ] The interest rates of the world > **Explanation:** Yield maintenance predominantly safeguards the lender to ensure they still receive their expected returns, even with prepayments.