Question

9. Which of the following statements is false?
a. A part of the default premium has to do with the frequency of default by the borrower.
b. For the home loan, the collateral (the house) is an asset that will increase in value over time (in general) compared with a car loan in which the col-lateral (the car) decreases in value over time.
c. With a car, the potential loss due to default is less than a house because the growing value of the asset should be sufficient to cover the outstand-ing balance (principal) of the loan.
d. A personal credit card essentially has no collateral, so the potential loss is even higher if the customer defaults on his or her credit card payments.

Answer 1

Answer:

Correct answer is:

c. With a car, the potential loss due to default is less than a house because the growing value of the asset should be sufficient to cover the outstanding balance (principal) of the loan.

Explanation:

Car value does not grow as it is depreciated and its value decreases over time. The value of house will normally increase in value over time as compared with a car. Hence the statement c is false.

Other (a, b and d) statements are true.

Hence option c is correct and other options a, b and d are incorrect.