Multiple Choice
As the months progress on an amortized loan, which of the following statements is true regarding the composition of each monthly payment?
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7. Receivables and Investments
Introduction to Investments in Securities
Multiple Choice
In the context of investments in securities, a fixed-rate mortgage means your payment and interest rate won't:
A
increase only if the market interest rates rise
B
change over the life of the loan
C
decrease if you make extra payments
D
be affected by inflation
Verified step by step guidance1
Understand the concept of a fixed-rate mortgage: A fixed-rate mortgage is a type of loan where the interest rate remains constant throughout the life of the loan, regardless of changes in market interest rates or inflation.
Analyze the first option: 'Your payment and interest rate won't increase only if the market interest rates rise.' This statement is partially correct but does not fully capture the essence of a fixed-rate mortgage, as the rate does not change under any circumstances.
Evaluate the second option: 'Your payment and interest rate won't change over the life of the loan.' This is the correct description of a fixed-rate mortgage, as the interest rate and payment amount remain fixed for the duration of the loan term.
Consider the third option: 'Your payment and interest rate won't decrease if you make extra payments.' While making extra payments can reduce the principal balance and potentially shorten the loan term, it does not affect the fixed interest rate or payment structure.
Assess the fourth option: 'Your payment and interest rate won't be affected by inflation.' While inflation can impact the real value of money, it does not alter the fixed interest rate or payment amount in a fixed-rate mortgage.
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