REFIA CH.5

Which provides for a more timely adjustment for lenders?

ARM

A PLAM loan for 15 years at an annual interest rate of 3% and a balance of $150,000 was made. Suppose inflation increased by 3% over the first year. What is the new loan balance at the end of the first year?

$146,218

An ARM loan for 30 years at an annual interest rate of 4% and a balance of $50,000 was made. Suppose the market index rises at the end of one year and the new interest rate on the ARM is 6%. What is the new monthly payment on the outstanding loan balance for the remaining 29 years?

$298.16

Consider a fully amortizing mortgage loan of $75,000 for 25 years (12 periods per year) with an interest rate of 12%. What is the loss if interest rates increase to 13%?

$4,962

A PLAM loan for 30 years at an annual interest rate of 3% and a balance of $50,000 was made. Suppose inflation increased by 2% over the first year. What is the new loan balance at the end of the first year?

$49,935

Consider a fully amortizing mortgage loan of $75,000 for 30 years (12 periods per year) with an interest rate of 12%. What is the loss if interest rates increase to 13%?

$5,260

An ARM loan for 30 years at an annual interest rate of 5% and a balance of $75,000 was made. Suppose the market index rises at the end of one year and the new interest rate on the ARM is 8%. What is the new monthly payment on the outstanding loan balance for the remaining 29 years?

$546.77

The maximum interest rate on an ARM loan at a beginning rate of 6% with rates capped at 2% per year and 5% overall is?

11%

The maximum interest rate on an ARM loan at a beginning rate of 7% with rates capped at 2% per year and 5% overall is?

12%

A 5/1 hybrid has how many years of a fixed rate?

5

At the time of origination, will an ARM or FRM have a higher expected yield?

FRM

The lender assumes the most interest rate risk with which type of mortgage loan?

FRM

T/F: A PLAM provides a more timely adjustment for lenders than an ARM.

False. An ARM provides a more timely adjustment for lenders than a PLAM.

The time it takes for payments to be adjusted under a PLAM is called:

adjustment interval

Interest rate risk is ______ for a fixed rate mortgage.

asymmetric

The expected yield provides the ______ for comparing the cost of ARM loans with different terms and conditions.

best method

ARM loans with highly unrestrictive terms tend to shift more interest rate risk to the ____ .

borrower

ARM loans with highly unrestrictive terms tend to shift more interest risk to the ______.

borrower

An ARM may change the ability of a ____ to make mortgage payments.

borrower

ARM and FRM loan yields will increase as risk shifts from ______ to ______.

borrower to lender

An ARM loan has a feature limiting the annual amount an interest rate can increase. This feature is an interest rate ____ .

cap

Floating rate loans are typically used to finance which type of property?

commercial

A floating rate loan is used to finance:

commercial properties

With a PLAM, the lender ______ bear the risk of changes in rate or risk premium.

does

The use of an ARM ______ the risk of loss due to interest rate risk. Multiple choice question.

does not eliminate

Which of the following are mortgage loans where interest rates may change with market conditions? Multiple select question. floating rate mortgage fixed rate mortgage adjustable rate mortgage

floating rate mortgage adjustable rate mortgage

A PLAM loan balance can ______.

go up or down

CPI is based on changes in the prices of ______.

goods

The default risk of an ARM is ______ a FRM, all else equal.

higher than

A loan that has a fixed rate period and then floats is called a ____ loan.

hybrid

Interest rate risk of an ARM _____ (increases/decreases) with the adjustment interval.

increases

Borrowers have an incentive to default on a PLAM loan when the CPI ______ house prices.

increases faster than

A price adjusted mortgage shifts the risk of changes in what from lenders to borrowers?

inflation

An interest only requires ______ to be paid monthly.

interest

The amount of _____ rate risk held by the lender may be adjusted by changing the terms of an ARM.

interest

With a fixed rate mortgage, the ____ bears the interest rate risk.

lender

Under an adjustable rate mortgage, who bears interest rate risk?

lenders and borrowers

A ____ incurred by lenders results in a ___ to borrowers.

loss, gain

Maximum caps will ______ the risk to borrowers of ARMS.

lower

The terms of an ARM are negotiated ______.

when the loan is made

T/F: Inclusion of caps or floors on the interest rate will impact the yield of an ARM.

True

A borrower must choose between ARM Loan A with a 2.5% lifetime interest rate cap and ARM Loan B with an interest rate that is unrestricted. Which of these 2 ARM loans will better protect the borrower during extended periods of rising interest rates?

ARM Loan A

Which of the following determine the expected yield of an ARM? Multiple select question. the margin the loan amount an interest rate index the initial interest rate

the margin an interest rate index the initial interest rate

A _____ cap limits the annual increase in monthly payments of an ARM loan.

payment

A price level adjusted mortgage adjusts the loan balance by what?

price index

If an ARM has a payment cap and negative amortization, the receipt of cash flow can be ______.

pushed into the future

If PLAM programs were adopted extensively the adjustment interval would need to be ______.

short

An adjustable rate mortgage is used to finance:

single family residence