Describe the Major Tools and Criteria for Decision Making -What Is the Best Payoff Rate for the 1-Year ARM

question 27

Multiple Choice

Describe the major tools and criteria for decision making. Use the information below to answer the following question(s) . Below is a payoff table that lists four mortgage options: $$\begin{array} { | l | l | l | l | } \hline &{ \text { Outcome } } \\\hline \text { Decision } & \text { Rates Rise } & \text { Rates Stable } & \text { Rates Fall } \\\hline \text { 1-year ARM } & \$ 66,645 & \$ 43,650 & \$ 38,560 \\\hline \text { 3-year ARM } & \$ 62,857 & \$ 47,698 & \$ 42,726 \\\hline \text { 5-year ARM } & \$ 55,895 & \$ 50,894 & \$ 48,134 \\\hline \text { 30-year fixed } & \$ 52,276 & \$ 52,276 & \$ 52,276 \\\hline\end{array}$$
-What is the best payoff rate for the 1-year ARM?

• A) $ 49,618
• B) $ 43,650
• C) $ 38,560
• D) $ 66,645

Comprehend the difference between the principal's and agent's interests within their relationship.

Understand the principle of aligning decision-making with information availability.

Identify strategies to mitigate agency costs.

Understand the principle of decentralizing decision-making based on information distribution.

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Definitions:

Clear Guidelines

Explicitly stated and easily understandable rules or instructions designed to direct behavior or processes.

Corrective Action

Steps taken to eliminate causes of existing nonconformities or undesirable situations to prevent recurrence.

Daniel Kahneman

A psychologist known for his work on the psychology of judgment and decision-making, as well as behavioral economics, for which he was awarded the Nobel Prize in Economic Sciences.

Fast

Moving or capable of moving at high speed.