Jill asks ..

" After the 5 year fixed-rate term is up, I'm also considering changing the loan to interest-only. What would be the impact on my repayments and my loan interest rate? What would you recommend I do?

You reply...

"If no other loan characteristic changes, so interest rate and loan term remain the same, moving to an interest-only loan will have important consequences on your repayments and interest rate.

From the bank's perspective, an interest-only loan is more (risky/less) risky. So, they will likely charge you a higher/lower interest rate than for an equivalent amortising loan.

Depending on the difference in interest rate, your monthly repayments could be lower. This is because when interest-only, you do not make any (loan/principal) repayments till the end of the interest-only term.

So to conclude, when you change from amortising to interest-only:

• Your repayment would be (higher/lower) due to a higher interest rate
• Your repayment would also be (higher/lower) due to not making any principal repayments.

Whether your net repayment is higher or lower than now depends on how much more interest the bank charges you.

What would I recommend you do? I would recommend you make the choice that best suits your personal risk preferences and personal financial circumstances when you have the relevant information."

The final conversation you have with Bob and Jill is about how to evaluate investments.

Jill looks at you quizzingly ...

" Earlier when you were helping us identify which investment fund to pick, you were doing something with the return standard deviation. I don't understand that.

When a fund earns 20%, it's better than another which earns 10%. That's all to it, right? "

You smile and reply ...

" Jill, when you go shopping in Chadstone for a handbag, would it be correct me to say, there is no difference between an LV bag for $1,000 and a Target bag for $100? "

Jill groans ...

" You men, the LV bag has much more value to me, because of brand and quality. That's why I'm happy to pay( more/less)but the Target bag has a lower quality and brand, so I pay (more/less) . It's the same for cars, wouldn't you pay more for a Mercedes Benz than for a Hyundai? But what has value vs price got to do with risk and return? "

Your lean forward ..

" Jill, you are absolutely correct. You pay for the value you receive. With that same thinking, when funds earn a return, they do so by the (risk/decisions) that they take.

Think about when you put your money in the bank, earning 1%, but there is almost no risk. Imagine taking your money to gamble at crown casino, you could earn a much higher 100% return or more, but at much greater risk.

Can we say that going to the crown and earning 100% is a better investment than the bank which earns you 1%? No, of course, we can't, because the risk is different, so we can't compare investments by returns alone.

So we need to adjust our returns, for the risk taken. We do so by (multiplying/dividing) the return by the risk, to obtain the return earned per unit of risk. This allows us then to compare returns of alternative investments objectively and fairly across the same risk. "

Choose which is the most suitable word in bracket