f
ARMs were developed because lenders were tired of offering a limited selection of loan alternatives to borrowers (t/f)
t
ARMs help lenders combat unanticipated inflation changes, interest rate changes, and a maturity gap (t/f)
t
Characteristics of a PLAM include an increasing mortgage payment and an adjusting loan balance tied to an index (t/f)
f
A major benefit of a PLAM is the mortgage payment increases closely following borrower salary increases (t/f)
f
PLAMs have been very popular with lenders (t/f)
t
Lender's can partially avoid estimating interest rates by tying an ARM to an interest rate index (t/f)
f
Negative amortization reduces the principal balance of a loan (t/f)
t
the floor of an ARM is the maximum reduction of payments or interest rates allowed (t/f)
f
ARMs eliminate all the lender's interest rate risk (t/f)
f
The default risk of a FRM is higher than the default risk of an ARM (t/f)
chapter
Which is NOT a component of an ARM?
lower interest rate risk, higher default risk
risk position of an ARM lender in comparison to that of a FRM lender?
there is a payment cap and the interest rates are increasing
negative amortization is more likely to occur when
Assume the worst case scenario and use interest rates at their highest possible point over the life of the loan
In order to calculate the APR for an ARM, you must
The price level used to index PLAMs is measured on an ex post basis and historic prices may not be an accurate reflection of future price
Which of the following is a disadvantage of PLAMs?
Adjustment interval is longer than one year
Which of the following clauses leads to higher risk for an ARMs lender?
An ARM with no caps or limitations
Given that every other factor is equal, which of the following ARMs will have the lowest expected cost?