An embedded option associated with the following instrument potentially alters the rate sensitivity of the underlying...
An embedded option associated with the following instrument potentially alters the rate sensitivity of the underlying instrument.
Fixed-rate mortgage loan with a yield of 5.5 percent and 30-year final maturity.
The option is typically exercised when interest rates _____ substantially. It is the ____that determines when the option is exercised.
| X | A. |
increase; bank |
| B. |
decrease; bank |
|
| C. |
increase; bank’s customer |
|
| D. |
decrease; bank’s customer |
(continue from problem 1)
An existing fixed-rate mortgage is ____ rate sensitive in a ____ rate environment.
| A. |
more; rising |
|
| X | B. |
more; falling |
| C. |
less; falling |
(continue from problem 1)
Does the exercise of the option affect NII? If yes, will it _____ bank’s net interest income.
| A. |
No |
|
| X | B. |
Yes; increase |
| C. |
Yes; decrease |
Homework Answers
Problem 1.
Answer. Option D
Problem 2.
Answer. Option A.
Problem 3.
Answer. Option C.
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