Suppose that the interest rate on a conventional 30-year mortgage is currently 8%. You receive a call from a mortgage broker who offers you a 30-year adjustable rate mortgage at 2% that is adjusted once each year. Evaluate each mortgage in terms of the following: risk that the monthly payment will change over the next 30 years and interest-rate risk.
What will be an ideal response?
The fixed-rate mortgage protects the borrower and the lender from any risk that the monthly payment will change. Whether the interest rate increases (reducing the present value to the lender) or decreases (increasing the present value to the lender), the payment is always the same. The risk that the present value of the mortgage will change because of a change in interest rates is the interest-rate risk. The adjustable rate mortgage has no interest-rate risk (because the present value is adjusted), but there is considerable risk that the monthly payment will change.
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A) decrease; increasing B) increase; increasing C) increase; decreasing D) decrease; decreasing
The Brander-Spencer model identified market failure in certain industries due to
A) unfair competition. B) wildcat destructive competition. C) environmental negative externalities associated with pollution. D) limited competition. E) lack of excess returns.
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A. $250,000. B. $200,000. C. $400,000. D. $225,000.
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A. negative; aggregate expenditures B. negative; nominal expenditures from the government C. positive; aggregate expenditures from the government D. positive; nominal expenditures from households