Homework Sourse1 If you assume market interest rates are expected to increa
1. If you assume market interest rates are expected to increase over the term of the loan, would you prefer a loan with a fixed interest rate for the life of the loan or rather a loan with a variable rate that changes in response to market interest rate? (Assume that both loans start with the same interest rate.) Would your answer change if market interest rates are expected to decrease over the term of the loan?
1. If you assume market interest rates are expected to increase over the term of the loan, would you prefer a loan with a fixed interest rate for the life of the loan or rather a loan with a variable rate that changes in response to market interest rate? (Assume that both loans start with the same interest rate.) Would your answer change if market interest rates are expected to decrease over the term of the loan?
1. If you assume market interest rates are expected to increase over the term of the loan, would you prefer a loan with a fixed interest rate for the life of the loan or rather a loan with a variable rate that changes in response to market interest rate? (Assume that both loans start with the same interest rate.) Would your answer change if market interest rates are expected to decrease over the term of the loan?
Solution
1). If the rates are expected to be increasing overtime then we would opt for the fixed interest rate mortgage, which will enable us to lock a lower interest rate rather than paying a higher increasing interest rate due to the changes in the market.
2). If the rates are expected to be decreasing in the future, we would prefer a variable rate that changes in response to market interest rates.
