Economics · Banking and Finance
A bank offers two mortgage products: one with a Fixed Interest Rate and one with a Floating Interest Rate. What is the primary risk difference between these two products for the borrower?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1The Floating Interest Rate calculation only considers the principal amount, whereas the Fixed Rate calculation uses the amortized schedule for repayment of a debt.
- 2The Fixed Interest Rate product is only applicable to long-term loans, whereas the Floating Rate product is used exclusively for short-term working capital loans.
- 3The Floating Interest Rate product exposes the borrower to interest rate risk, as periodic rate adjustments may increase the monthly repayment amount, while the Fixed Rate product eliminates this risk.✓
- 4The Fixed Interest Rate product has a lower effective cost over the life of the loan, while the Floating Rate product is always tied to the bank's internal cost of funds.
Correct answer
The Floating Interest Rate product exposes the borrower to interest rate risk, as periodic rate adjustments may increase the monthly repayment amount, while the Fixed Rate product eliminates this risk.
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