An increase in either the risk-free rate or the risk premium on a fixed-rate mortgage results in a higher required rate of return when investing in the mortgage and therefore causes the mortgage price to decrease.

Question

Quizplus · Accepted Answer

When the risk-free rate or the risk premium increases, the required rate of return for investors also increases. Since the price of a fixed-rate mortgage is inversely related to the required rate of return, an increase in either rate causes the mortgage price to decrease.

An Increase in Either the Risk-Free Rate or the Risk