Questions and Answers
Who assumes the interest rate risk in a fixed rate mortgage?
What is a significant advantage of a variable rate mortgage for borrowers?
What is one reason that contributes to the popularity of credit cards?
What is the maximum amount of margin debt that can be borrowed based on federal regulations?
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Which of the following loans is considered a closed-end credit?
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What percentage of collateral value can one borrow on an ongoing basis for margin debt?
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Which of the following types of credit is not typically viewed as a closed-end loan?
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Which type of borrower is constantly seeking more funds and may accept any payment terms offered?
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In an amortizing loan, which statement is true about the payment structure at the beginning of the term?
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Which regulation affects the amount of borrowing allowed against margin debt?
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Study Notes
Popularity of Credit Cards
- Credit cards are favored due to their convenience.
- They help smooth out spending by allowing users to avoid holding large cash balances.
- Bank loans can be more costly for amounts under a few thousand dollars, considering fixed and transaction costs.
Margin Debt Regulations
- The Federal Reserve allows borrowing up to 50% of the fair market value of securities on margin at purchase and 25% of the collateral value on an ongoing basis.
Pension Loan Limits
- Borrowers can take loans up to 50% of their vested account balance or $50,000, whichever is less.
Types of Credit
- Bank loans, pension loans, and insurance loans are typically closed-end credit types, which means they have a fixed repayment schedule.
Factors Affecting Credit Scores
- Lower credit scores can result from various factors, including financial circumstances like having only one wage earner, marital status, or the number of dependents.
Fixed vs. Variable Interest Rates
- Fixed Rates: Lender bears interest rate risk; borrowers can refinance when rates decline.
- Variable Rates: Borrowers absorb interest rate risk; rates may change based on benchmarks.
Debt Tax Deductibility and Security
- Different types of debts such as mortgages may be tax-deductible.
- Secured debts require collateral, while unsecured debts do not.
Borrower Types and Needs
- "Unrational borrowers" are those constantly seeking funds, potentially accepting any payment terms offered.
Assessing Creditworthiness
- Credit assessment involves examining income, outstanding debt, repayment history, and collateral security.
Fannie Mae
- Fannie Mae refers to the Federal National Mortgage Association, which supports affordable housing finance.
Impact of Government Supported Organizations
- Organizations like Fannie Mae and Freddie Mac aim to broaden access to credit at cheaper rates.
Amortizing Loans
- For amortizing loans, early payments consist mainly of interest, with a gradual increase in principal paydown over time.
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Description
Test your knowledge on hybrid ARMs and the reasons behind credit card popularity. This quiz covers various aspects of personal finance, including the advantages and disadvantages of different financing options. Perfect for students studying finance or anyone interested in improving their financial literacy.
