Chuck Spencer wants to borrow money for three years to purchase a new car.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 higher 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, Chuck is agreeing to share the interest rate risk with the lender. If interest rates rise, he will have to pay more in interest, but if they fall, he will pay less. This reduces the lender's risk since they are not solely responsible for fluctuations in interest rates.

Chuck Spencer Wants to Borrow Money for Three Years to Purchase