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:
A)sharing the interest rate risk with the lender.
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, Frank is sharing the interest rate risk with the lender. This means that if interest rates increase over the three-year period, Frank's monthly payments will increase, but if interest rates decrease, his monthly payments will decrease as well. By contrast, with the fixed rate loan, Frank would have a consistent payment amount for the entire three-year period regardless of any fluctuations in interest rates.

Frank West Wants to Borrow Money for Three Years to Purchase