What is the difference between interest rate risk and default risk? How do combinations of terms in ARMs affect the allocation of risk between borrowers and lenders?

Q: How can the effect of below-market-rate loans on value be determined using investor criteria?

A: Below market interest loan is the loan on which interest rate is charged less than the current…

Q: Formula for interest rate parity?

A: Interest Rate Parity: It is the technique used to govern the relation between currency exchange rate…

Q: What are credit derivatives, and how do they operate?

A: Derivative instrument is the financila instrument which derive its value form the underlying asset.

Q: How does the decision to use debt involve a risk-versus-return trade-off?

A: Risk return trade off: If an investment has high risk, the investors expect more returns from it. If…

Q: What is the difference between the stated interest rate and the market interest rate?

A: Bonds PayableBonds payable are referred to long-term debts of the business, issued to various…

Q: What is a debt security?

A: Bonds: Bonds are long-term promissory notes that are issued by a company while borrowing money from…

Q: What is The Relationship between Interest Rate Risk, Default Risk, and Risk Premiums

A: Risk refers to the chances of any changes in the prices of securities underlying with an investor…

Q: How does the emergence of interest-rate risk helpexplain financial innovation?

A: Interest rate risk is defined as the risk that is faced by the bond holders because of the changing…

Q: From the standpoint of a borrower, is long-term or short-term credit riskier? Explain

A: credit risk is define as the chances of a loss due to  borrower's failure to repay obligation in…

Q: How does risk affect interest rates?

A: The risk and the interest rates are in a direct relationship that is, the greater the risk the…

Q: Explain Risk Premiums, Interest Rate Risk, and Default Risk?

A: Risk premium: A risk premium is nothing but the return above the risk-free rate of return that an…

Q: What are the major drivers of portfolio-level credit risk?

A: Financial institutions are frequently mapping and controlling the risk from credit exposures at…

Q: What is Interest Risk and Cash Flow Risk?  What is the difference between Interest Risk and Cash…

A: Risk exists in all business operations and transactions however the business should take actions to…

Q: From the borrower’s standpoint, what are the advantages and disadvantages ofsecuring a loan?

A: Secured loans means offering an asset or  property to the lender as a collateral against the funds…

Q: Which one of the theories states that “the rate of interest is set in the market for money…

A: Interest rates are fluctuated based on different parameters of the economy. There are different…

Q: How does a credit default swap work?

A: The credit default swap is a financial derivative and an agreement between two parties. The seller…

Q: Credit-rating agency ratings are associated with which of the following investor risks? interest…

A: Credit rating ageencies like S&P and Moody's are involved in analyzing the balance sheet and…

Q: What is securitization? What are its advantages to borrowers?What are its advantages to lenders?

A: Securitization is a financial process that takes an asset of some kind and turns it into a security,…

Q: What are the main differences between ARMs and FRMs loans? You need to highlight the differences in…

A: Loan which are provides to the borrower either in Adjusted Rate of Mortgage or Fixed Rate of…

Q: Why might the market value of a loan differ from its outstanding balance?

A: Loan outstanding balance: The outstanding balance or loan balance is the remaining amount that is…

Q: What are the advantages to borrowers and risks to lenders for each?

A: Borrowers are the people who borrows the money for any specific purpose. Borrowers pay some amount…

Q: What is duration gap model? Explain the concept of duration. How duration measure can be used to…

A: Duration gap measures the mismatch between the duration of assets and liabilities held by a…

Q: What is “imputed interest”? In what situations is it necessary to impute an interest rate for notes…

A: Imputed Interest: According to the Internal Revenue Service (IRS), an imputed interest is an…

Q: How are interest rate risk and reinvestment raterisk related to the maturity risk premium?

A: The maturity risk premium is the premium for the hazard created amid an asset's life by conceivable…

Q: What is the role of transferring credit risk? What is the various instruments used to transfer this…

A: Risk transfer is a management strategy that involves transferring the risk from one party to another…

Q: What is credit risk

A: In the world of finance credit risk is one of the most important risk and one of the most tangible…

Q: What are some types of credit derivatives?

A: A credit derivative is a type of financial contract where credit assets are kept as an underlying…

Q: Explain Interest Rates and Risk?

A: Interest Rate: Interest rate is the percentage of interest charge by a lender on his principal…

Q: What is the significance of credit/debt ratings

A: Credit Ratings: Credit Rating is an estimate of the borrower (be it a person, organization, or…

Q: What are credit default swaps and how do they work?

A: Financial derivatives are referred as the financial contracts where the value of these contracts is…

Q: Explain the interest rate risk?

A: The amount charged by a lender to a borrower for any type of debt is referred to as an interest…

Q: How VAT affects the interest rate?

A: Solution-Value Added Tax  A value-added tax (VAT) is a consumption tax placed on a product whenever…

Q: which of the following risks is most closely associated with off balance sheet? trading risk

A: Off balance sheet practice means when some liabilities and assets are not part of company's balance…

Q: How is a credit default swap like insurance?

A: Swap is a type of financial derivative contract which transfers liabilities of one person to other…

Q: What are the pros and cons of loaning?

A: Loaning is a process of lending money. An interest rate is charged by the lenders on the money lent…

Q: How are Effective Interest Rates calculated?

A: Effective interest rate is the interest earned on the investment or saving account.

Q: Differentiate between interest rate risk and default risk and explain how combinations of terms in…

A: A mortgage is a loan agreement between a bank and a borrower, in which a borrower borrows a specific…

Q: What is Interest Risk and Cash Flow Risk?

A: Risk exists in all business operations and transactions however the business should take actions to…

Q: How should derivatives be used in risk management? What problems can occur?

A: Derivatives are financial instruments that have values derived from other assets like stocks, bonds,…