Frank West wants to borrow money for three years to purchase a new boat. He has been offered a seven percent fixed rate loan and also a variable rate loan that has an initial rate of five percent. By choosing the variable rate loan, Chuck is reducing the lender's risk by:
A) sharing the interest rate risk.
B) increasing his monthly payments.
C) taking a larger stake in the asset he is purchasing.
D) repaying the loan over a faster period of time.
E) pledging collateral.

Question

Quizplus · Accepted Answer

By choosing the variable rate loan, Frank is sharing the interest rate risk with the lender. If interest rates rise, Frank's monthly payments will increase, but if interest rates fall, his monthly payments will decrease, which reduces the lender's risk. Additionally, none of the other choices presented address the issue of risk reduction for the lender.

Frank West Wants to Borrow Money for Three Years to Purchase