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All else being equal, with an Fixed Rate Mortgage (FRM) compared to an Adjustable Rate Mortgage (ARM), there is ________...

All else being equal, with an Fixed Rate Mortgage (FRM) compared to an Adjustable Rate Mortgage (ARM), there is __________ default risk and ___________ prepayment risk.

A. equal; equal

B. less; less

C. greater; less

D. less; greater

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Answer #1

Option B - A fixed rate mortgage will have lower default and prepayment risk than an adjustable rate mortgage, mainly because the interest rates change periodically. As a result, if the interest rate increases, borrower may not be able to make the payment. On the other hand, if the rate falls, borrower may take advantage of that to prepay the loan.

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