Say that there are expectations of increases in the risk free rate over the following 10 years. You are considering whether to finance a real estate investment with a 10-year FRM or a 10-year ARM, both fully amortizing. The ARM rate adjusts every 2 years.

(a) Which rate do you expect would be higher, FRM or ARM?

(b) Which mortgage offers a hedge against future increases in rates, from your perspective (the perspective of the borrower)?

Answer rating: 100% (QA)

Solution The difference between a 10year FRM Fixed Rate Mortgage and a 10year ARM Adjustable Rate Mo... View the full answer