P3-52 quiz

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Question 1 of 8

1. Question
Why might a borrower who does not plan to stay in a home for a long period choose an ARM instead of a fixed-rate mortgage?
- A) Because the ARM guarantees the interest rate will never change
- B) Because the lower initial payments let them qualify for a larger loan and benefit before rates adjust
- C) Because ARMs always have lower total finance charges than fixed-rate loans
- D) Because ARMs require no income or asset verification
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Question 2 of 8

2. Question
Most ARMs described in the text have a maximum annual interest rate increase of 2% and a maximum lifetime increase of 6%. If the initial rate is 4%, what is the highest rate this loan could ever reach?
- A) 6%
- B) 8%
- C) 9%
- D) 10%
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Question 3 of 8

3. Question
Given the 2% annual cap and 6% lifetime cap described, what is the minimum number of years it would take for an ARM starting at 4% to reach its 10% lifetime cap, assuming the rate increases by the maximum amount each adjustment?
- A) At least three years
- B) One year
- C) Two years
- D) It could reach the cap immediately after the first adjustment
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Question 4 of 8

4. Question
According to the text, what happens to a borrower’s interest rate on an ARM if the underlying index rates decline at the time of adjustment?
- A) The interest rate must still increase by the maximum annual cap
- B) The interest rate remains fixed at the original start rate
- C) The borrower could receive a lower interest rate
- D) The loan automatically converts to a fixed-rate mortgage
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Question 5 of 8

5. Question
In the context of ARMs, how is an index defined in the text?
- A) The lender’s internal profit margin on each loan
- B) A statistic that indicates some current or financial condition
- C) The borrower’s combined loan-to-value ratio
- D) The appraised value used for underwriting
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Question 6 of 8

6. Question
What is identified as a major disadvantage of using a Treasury Bill Index for ARM adjustments?
- A) They are not recognized by any U.S. financial institution
- B) They can only be used on fixed-rate mortgages
- C) They are too stable and rarely change over time
- D) Their volatility can cause large payment changes up to the maximum cap at each adjustment
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Question 7 of 8

7. Question
Which statement best describes the 11th District Cost of Funds Index (COFI) as presented in the text?
- A) It is a relatively stable, least-volatile index that lags market changes because it averages the cost of funds to 11th District institutions
- B) It is the most volatile index, changing daily with stock prices
- C) It reflects only short-term Treasury Bill yields
- D) It is based solely on new mortgage loan rates in the San Francisco area
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Question 8 of 8

8. Question
Which of the following is true about the London Inter-Bank Offered Rate (LIBOR), according to the text?
- A) It is based on U.S. savings account rates in the 11th Federal Home Loan Bank District
- B) It measures only long-term government bond yields
- C) It is a daily reference rate for unsecured interbank borrowing in London and is being phased out by June 30, 2023
- D) It is a fixed index that does not change over time
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