Question

Johan takes out a 20-year mortgage at 4% to buy a house. When he looks at investing in 20-year, fixed-rate Treasuries, which of the following rates is most likely closest to the coupons on the Treasuries? Select the best answer from the choices provided. 2.2% 7.8% 3.9% 9.2%

Answer 1

3.9%

Explanation:

Investing in treasuries is often seeing as a risk free investment since it is sure that they will pay, but the rates are too low, when banks and other finnance corporations set up their mortages and other kinds of large loans interests rates they set them up higher than the fixed rate treasuries since otherwise it´d just be a better deal to put that money on treasuries than lending it to people.

Answer 2

Given that Johan takes-out a 20 year mortgage at 4% to buy a house. If he looks at investing in 20-year, fixed rate Treasuries, the most likely closest to the coupons of the treasuries is 3.8%, this is because any other rates apart from this will lead to an arbitrage opportunity. This means that if the percentage of the coupons are high, Johan may invest his proceeds from mortgage to treasuries and earn risk free interest. The right rate is 3.9%