Describe the Major Tools and Criteria for Decision Making The Probability of Rates Rising Is 0

question 21

Multiple Choice

Describe the major tools and criteria for decision making. Use the information below to answer the following question(s) . The payoff table given below lists four mortgage options: $\begin{array}{|l|l|l|l|}\hline &\text { Outcome }\\\hline \text { Probability } & {\mathbf{0 . 6}} &{\mathbf{0 . 3}} &{\mathbf{0 . 1}} \\\hline \text { Decision } & \text { Rates Rise } & \text { Rates Stable } & \text { Rates Fall } \\\hline \text { 1-year ARM } & \$ 66,645 & \$ 43,650 & \$ 38,560 \\\hline \text { 3-year ARM } & \$ 62,857 & \$ 47,698 & \$ 42,726 \\\hline \text { 5-year ARM } & \$ 55,895 & \$ 50,894 & \$ 48,134 \\\hline \text { 30-year fixed } & \$ 52,276 & \$ 52,276 & \$ 52,276 \\\hline\end{array}$ The probability of rates rising is 0.6, rates stable is 0.3, and rates falling is 0.1.
-Which of the following is considered the best expected value decision?

• A) 1-year ARM
• B) 3-year ARM
• C) 5-year ARM
• D) 30-year fixed

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Definitions:

Unsecured Open-End Credit

A line of credit that does not require collateral and can be used repeatedly up to a certain limit.

Annual Percentage Rate

The annual rate charged for borrowing or earned through an investment, expressed as a percentage that represents the actual yearly cost of funds over the term of a loan or income from an investment.

Newspaper Advertisement

A public announcement or promotion of products, services, or events published in a newspaper.

Savings And Loan Association

A financial institution that specializes in accepting savings deposits and making mortgage and other loans.