Use the Information Below to Answer the Following Questions) The Probability of Rates Rising Is 0

question 23

Multiple Choice

Use the information below to answer the following questions) . The payoff table given below lists four mortgage options: $$\begin{array} { | l | l | c | c | } \hline && { \text { Outcome } } \\\hline \text { Probability } & 0.6 & { 0.3 } & 0.1 \\\hline \text { Decision } & \text { Rates Rise } & \text { Rates Stable } & \text { Rates Fall } \\\hline \text { 1-year ARM } & \$ 66,645 & \$ 43,650 & \$ 38,560 \\\hline \text { 3-year ARM } & \$ 62,857 & \$ 47,698 & \$ 42,726 \\\hline \text { 5-year ARM } & \$ 55,895 & \$ 50,894 & \$ 48,134 \\\hline \text { 30-year fixed } & \$ 52,276 & \$ 52,276 & \$ 52,276 \\\hline\end{array}$$ The probability of rates rising is 0.6, rates stable is 0.3, and rates falling is 0.1.
-What is the expected payoff of the 5-year ARM?

• A) $ 17,872.90
• B) $ 53,618.60
• C) $ 48,805.20
• D) $ 20,081.80

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Definitions:

Panic Disorder

A psychiatric disorder characterized by sudden and repeated episodes of intense fear accompanied by physical symptoms.

Recurrent Persistent Impulse

A repeated, ongoing urge to perform an act, often uncontrollably, which may lead to negative consequences.

Imminent Doom

A strong feeling of impending disaster or danger, often associated with anxiety disorders and panic attacks.

Panic Attack

A sudden episode of intense fear or anxiety, characterized by physical and psychological symptoms that can be overwhelming.