REA 400 chapter 5
Which provides for a more timely adjustment for lenders?
ARM
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 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?
49935
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%? Multiple choice question.
5260
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
At the time of origination, will an ARM or FRM have a higher expected yield? Multiple choice question.
FRM
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
Interest rate risk is _____ for a fixed rate mortgage. Multiple choice question.
asymmetric
An ARM may change the ability of a------ to make mortgage payments.
borrower
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.
does not eliminate
True or false: A PLAM provides a more timely adjustment for lenders than an ARM.
false
Which of the following are mortgage loans where interest rates may change with market conditions?
floating ARM
CPI is based on changes in the prices of __________.
goods
The default risk of an ARM is ______ a FRM, all else equal. Multiple choice question.
higher
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.
increase
Borrowers have an incentive to default on a PLAM loan when the CPI ______ house prices.
increases slower than
A price adjusted mortgage shifts the risk of changes in what from lenders to borrowers?
inflation
The amount of----- rate risk held by the lender may be adjusted by changing the terms of an ARM.
interest
Under an adjustable rate mortgage, who bears interest rate risk?
lender borrower
A ----- incurred by lenders results in a ----- to borrowers.
loss, gain
Maximum caps will ______ the risk to borrowers of ARMS.
lower
True or false: Inclusion of caps or floors on the interest rate will impact the yield of an ARM.
true
A PLAM loan balance can _______.
up or down
The terms of an ARM are negotiated ________. Multiple choice question.
when the loan is made
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? Multiple choice question.
price index
If an ARM has a payment cap and negative amortization, the receipt of cash flow can be _______.
pushed into the future
Which of the following determine the expected yield of an ARM?
rate index margin
If PLAM programs were adopted extensively the adjustment interval would need to be _______.
short
