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The average shape of the yield curve over long periods of time suggests that a. The...

The average shape of the yield curve over long periods of time suggests that

a. The average interest cost of an ARM will be lower than for an FRM

b. The average cost of an FRM will be lower than an ARM

c. The cost of an FRM and ARM will average out to be the same

d. Prepayments will be faster under an ARM
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Answer #1

The average shape of the yield curve over long periods of time suggests that the average interest cost of an ARM will be lower than for an FRM

Therefore correct answer is option a. The average interest cost of an ARM will be lower than for an FRM

The Adjustable Rate Mortgage (ARM) tends to have slightly lower long-term average interest rates than from a fixed-rate mortgage (FRM) because of higher interest rate risk. When comparing with similar FRM, ARM borrower takes on more interest rate risk.

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