What features of an adjustable-rate mortgage will affect its cash flow?
What will be an ideal response?
For an adjustable-rate mortgage (ARM), as the name implies, the note rate changesover the life of the loan. The note rate is based on both the movement of an underlyingrate, called the index or reference rate, and a spread over the index called the margin.
The basic ARM is one that resets periodically and has no other terms that affect themonthly mortgage payment. Typically, the mortgage rate is affected by other terms. Theseinclude
(1) periodic rate caps and (2) lifetime rate cap and floor. A periodic rate cap limitsthe amount that the interest rate may increase or decrease at the reset date. The periodicrate cap is expressed in percentage points.Most ARMs have an upper limit on the mortgagerate that can be charged over the life of the loan. This lifetime rate cap is expressed in termsof the initial rate. ARMs may also have a lower limit (floor) on the interest rate that can becharged over the life of
the loan.
A popular form of an ARM is the hybrid ARM. For this loan type, for a specified numberof years (three, five to seven, and 10 years), the note rate is fixed. At the end of the initialfixed-rate period, the loan resets in a fashion very similar to that of more traditionalARM loans.
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The following information pertains to Newman Company. Assume that all balance sheet amounts represent both average and ending balance figures and that all sales were on credit. Assets Cash and short-term investments $ 40,000 Accounts receivable (net) 30,000 Inventory 25,000 Property, plant, and equipment 215,000 Total Assets $310,000 Liabilities and Stockholders' Equity Current liabilities $
60,000 Long-term liabilities 95,000 Stockholders' equity—Common 155,000 Total liabilities and stockholders' equity $310,000 Income Statement Sales $90,000 Cost of goods sold 45,000 Gross margin $45,000 Operating expenses 20,000 Net income $25,000 Number of shares of common stock 6,000 Market price of common stock $40 Dividends per share $1.00 Cash provided by operations $40,000 What is the rate earned on total assets for this company? a. 8.1% b. 6.8% c. 10.5% d. 16.1%
Hypothetical stories are imaginary but believable
Indicate whether this statement is true or false.
Which of the following is an assumption of most of the traditional models in finance??
A. ?No nation can place constraints on the transfer of corporate resources. B. ?A competitive marketplace exists in which the terms of trade are determined by the participants. C. ?Cash flows in various parts of a multinational corporate system are always denominated in the same currencies. D. ?The exchange rate is determined by direct negotiation between the host government and the multinational corporation. E. ?The ability to curtail unprofitable operations is uniform in all the countries in which subsidiaries operate.
A car dealership is altering how it determines its advertising appropriation. It is moving from an approach where it sets its budget based on projected revenue for the coming year to one in which it identifies the cost required to meet certain goals. It is switching from the _____ approach to the _____ approach.
A. competitive-matching; arbitrary B. percentage-of-sales; competitive-matching C. competitive-matching; objective-and-task D. percentage-of-sales; objective-and-task E. arbitrary; competitive-matching