If an ARM Index Increased 15%,the Negative Amortization on a Loan

question 17

Multiple Choice

If an ARM index increased 15%,the negative amortization on a loan with a 5% annual payment cap is calculated by:

• A) using the same payment as last year and deducting 5% from the principal balance.
• B) increasing the payment by 5%.
• C) totaling the difference between the payment as if no cap existed and the 5% capped payment.
• D) compounding the difference between the payment as if no cap existed and the 5% capped payments.

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Definitions:

Efficient Outcome

An optimal allocation of resources where it is impossible to improve one party's position without worsening another's, often associated with maximized total welfare or utility in an economic context.

Total Surplus

The sum of consumer surplus and producer surplus in a market, representing the total net benefits to society from the trade.

Price Of Ethanol

The cost at which ethanol, a type of alcohol used as fuel, is sold in the market.

Supply Curve

A graph showing the relationship between the price of a good and the amount of it that suppliers are willing to produce and sell, typically upward sloping.