Question

Loan amortization with changing interest rates is a more representative financial model that uses different interest rates over different periods

a. true
b. false

Answer 1

The statement is **true**.

Loan amortization with changing interest rates, also known as an adjustable-rate mortgage or variable-rate mortgage, is a financial model where the interest rate on the loan varies over different periods. Unlike a fixed-rate loan, where the interest rate remains constant throughout the loan term, in an adjustable-rate loan, the interest rate may change periodically based on certain predetermined factors or market conditions.

This model reflects real-world scenarios where interest rates fluctuate due to changes in market conditions, economic factors, or specific terms outlined in the loan agreement. The interest rate adjustments typically occur at predetermined intervals, such as annually or semi-annually, and the borrower's payments can change accordingly, affecting the loan amortization schedule.

As the interest rates change over time, the payments made towards the loan may differ, leading to adjustments in the amortization schedule. This model is considered more representative of real-world financial scenarios where interest rates are subject to fluctuations.

Answer 2

True, loan amortization with changing interest rates uses different interest rates over different periods, as exemplified by an adjustable-rate mortgage (ARM) that adjusts to market conditions such as changes in inflation.

Step-by-step explanation:

Loan amortization with changing interest rates does indeed use different interest rates over different periods; therefore, the statement is true. Unlike a fixed-rate mortgage, which maintains the same interest rate throughout the life of the loan, an adjustable-rate mortgage (ARM) adjusts according to market interest rates. When unexpected events, such as a 3% fall in inflation, occur, a homeowner with an ARM would likely experience a decrease in their interest rates. The impact of inflation on interest rates is also evident where higher inflation can lead to an increase in the interest rates charged on loans, adjusting the cost of borrowing accordingly.