An Adjustable Rate Mortgage Is Offered with an Initial Interest

question 24

Multiple Choice

An adjustable rate mortgage is offered with an initial interest rate of 7.00%. The index is currently yielding 5.50%, and the margin is 200 basis points. What is the size of the "teaser"?

• A) There is no teaser.
• B) 50 basis points.
• C) 150 basis points.
• D) 350 basis points.

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Definitions:

Sharpe Ratio

A measure used to assess the risk-adjusted return of an investment by comparing its excess return to its standard deviation of returns.

Holding Period

The length of time an investment is held by an investor before being sold, which can affect tax treatment and investment strategy.

Correlation Coefficients

A measure that indicates the extent to which two variables change together, ranging from -1 to 1, where 1 means perfect positive correlation, and -1 means perfect negative correlation.

Diversification Benefits

The reduction in investment risk that is achievable by holding a variety of different investment instruments that have low correlation with each other.