Question

1a.A fixed-rate mortgage originator is adversely affected by ________ interest rates while the borrower is adversely affected by ________ interest rates.

A. increasing; decreasing

B. increasing; increasing

C. decreasing; decreasing

D. decreasing; increasing

E. stable; decreasing

1b. Of the following, the most likely effect of a decrease in income tax rates would be to

A. decrease the savings rate.

B. decrease interest rates.

C. decreases the supply of loanable funds.

D. all of these choices are correct.

1c.What is the price of 182-day money market security with a face value of $8,000 if the BEY is 3.574%?

A. $6,877.44

B. $6,925.48

C. $6,634.47

D. $6,725.36

E. $7,859.93

Answer 1

a) Increasing , decreasing

A fixed-rate mortgage originator is adversely affected by _Increasing___ interest rates while the borrower is adversely affected by __Decreasing______ interest rates.

Reason:

For a fixed rate mortgage originator , the issuer makes a contract with the swap party to revive fixed rate and pay libor+spread in the exchange.

As such when the fixed rate is passed on to the client , the bank or the originator has no option to cancel the terms until the expiry of the mortgage . As such , it the market interest rate rises , the bank would still be continuing to receive the fixed contacted rate instead of the higher prevailing rates on the market. So it adversely affects the originator.

While for the borrower , the borrower is obligate to pay the fixed rate until the end of the mortgage period . Thus in case , the interest rate in the market lowers, the borrower still has to pay the fixed contracted rate .