Question

what is interest rate risk and what does this have to do with adjustable rate mortgages?

Answer #1

**Interest rate risk**- It is the risk related to
fluctuations in interest rates. Interest rates go up and down as
per the monetary policy, inflation rate and economic conditions of
country. Interest rates are unpredictable.

**Adjustable Rate Mortgage-** It is the home loan
with interest rate that can change period to period. This can go up
or down and the monthly payment of mortgage can go up or down.

**Impact of interest rate risk on Adjustable Rate
Mortgage:**

When interest rate increases, amount of Adjustable Rate Mortgage also increases. There is fixed period for Adjustable Rate Mortgage, after that period ends, interest rate on Adjustable Rate Mortgage goes up. Interest rate remain fixed for the initial period of Adjustable Rate Mortgage after that change in market interest rate affect the interest rate of Adjustable Rate Mortgage.

With a Fixed Rate Mortgage, who holds the interest rate risk? Do
they hold all the risk or is it spread out? How could the groups
who holds the most risk, spread the risk? What is the biggest
advantage and disadvantage of fixed rate mortgages?

What is interest-rate risk? Why do banks face a significant
amount of interest-rate risk? How do banks manage interest-rate
risk?

What disclosures must be made under the adjustable interest rate
disclosure requirements?

What is financial risk and how does it affect interest rate?

What does it mean to immunize yourself from interest rate risk
using duration? How would you do it with a coupon
bond? Zero coupon bond?

Consider the following pool of mortgages:
100 mortgages with initial balance of $109,871, interest rate
3.3%, issued for 30 years with monthly payments
50 mortgages with initial balance of $255,193, interest rate
2.5%, issued for 15 years with monthly payments
What is the Weighted Average Coupon for this pool at
origination? Express your answer as a number rounded to 4 decimal
points (e.g. if your answer is 5.112%, write 0.0511).

Consider the following pool of mortgages:
100 mortgages with initial balance of $386,713, interest rate
2.8%, issued for 30 years with monthly payments
50 mortgages with initial balance of $364,046, interest rate
2%, issued for 15 years with monthly payments
What is the Weighted Average Maturity for this pool at
origination? Express your answer in months rounded to 2 decimal
points (e.g. if your answer is 5.6744 months, write 5.67).

Consider the following pool of mortgages: 100 mortgages with
initial balance of $166,669, interest rate 6.8%, issued for 30
years with monthly payments 50 mortgages with initial balance of
$377,354, interest rate 3.8%, issued for 15 years with monthly
payments What is the Weighted Average Maturity for this pool at
origination? Express your answer in months rounded to 2 decimal
points (e.g. if your answer is 5.6744 months, write 5.67).

Consider the following pool of mortgages: 100 mortgages with
initial balance of $327,344, interest rate 2.1%, issued for 30
years with monthly payments 50 mortgages with initial balance of
$366,012, interest rate 4%, issued for 15 years with monthly
payments What is the Weighted Average Maturity for this pool at
origination? Express your answer in months rounded to 2 decimal
points (e.g. if your answer is 5.6744 months, write 5.67).

Consider the following pool of mortgages:
100 mortgages with initial balance of $247,904, interest rate
6.9%, issued for 30 years with monthly payments
50 mortgages with initial balance of $386,587, interest rate
4.7%, issued for 15 years with monthly payments
What is the Weighted Average Maturity for this pool at
origination? Express your answer in months rounded to 2 decimal
points (e.g. if your answer is 5.6744 months, write 5.67).

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