Those question I got the answer(below) I just need the process and explain how t
ID: 2639546 • Letter: T
Question
Those question I got the answer(below) I just need the process and explain how to get the answer.Thanks
1 Which of the following descriptions most accurately reflects the risk position of an ARM lender in comparison to that of a FRM lender? (D)
Interest Rate Risk Default Risk
(A) Higher Higher
(B) Lower Lower
(C) Higher Lower
(D) Lower Higher
LOAN 1
LOAN 2
LOAN 3
LOAN 4
Initial Interest Rate
?
?
?
?
Loan Maturity (years)
20
20
20
20
% Margin Above Index
3%
---
3%
3%
Adjustment Interval
1 yr.
---
1 yr.
1 yr.
Points
1%
1%
1%
1%
Interest Rate Cap
NONE
----
1%/yr.
3%/yr.
Which loan in the above table should have the lowest initial interest rate? (A)
(A) Loan 1
(B) Loan 2
(C) Loan 3
(D) Loan 4
Which loan in the above table is a FRM? (B)
(A) Loan 1
(B) Loan 2
(C) Loan 3
(D) Loan 4
With which loan in the above table does the lender have the lowest interest rate risk? (A)
(A) Loan 1
(B) Loan 2
(C) Loan 3
(D) Loan 4
Under which scenario is negative amortization likely to occur? (C)
Payment Cap Interest Rates
(A) None Increasing
(B) None Decreasing
(C) 7.5% Increasing
(D) 7.5% Decreasing
A borrower has secured a 30 year, $150,000 loan at 7% with monthly payments.Fifteen years later, an investor wants to purchase the loan from the lender.If market interest rates are 5%, what would the investor be willing to pay for the loan? (C)
$75,000
$111,028
$118,478
$168,646
Assume that houses in an area appreciate at the rate of 4 percent a year. A borrower expects to have a loan-to-value ratio of 90 percent. What would be the approximate expected appreciation rate on home equity (EAHE)? (E)
4.0%
4.4%
10%
20%
40%
A property is purchased for $200,000 with an 80 percent LTV. After five years, the owner
LOAN 1
LOAN 2
LOAN 3
LOAN 4
Initial Interest Rate
?
?
?
?
Loan Maturity (years)
20
20
20
20
% Margin Above Index
3%
---
3%
3%
Adjustment Interval
1 yr.
---
1 yr.
1 yr.
Points
1%
1%
1%
1%
Interest Rate Cap
NONE
----
1%/yr.
3%/yr.
Explanation / Answer
Interest rate risk arises due to the fluctuations in the interest rate of ARM index. For a lender the interest rate risk is lower and for borrower it is higher. This is because the borrower would have to pay higher interest rate after the initial period, and after initial period the rate of interest is likely to increase so for the ARM lender interest rate risk is lower.
The default risk arises when the borrower do not pay the installment of the mortgage. In an ARM the borrower is most likely to default if he/she faces more interest rate risk. Thus, the default risk is higher for the lender in ARM.
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