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While balloon mortgage loan payments are typically based on a 30-year amortization schedule, the loan actually matures in either 3, 5, 7, or 10 years. Of the following, which is the primary risk that a lender reduces their exposure to through the relatively short loan term on a balloon mortgage?
A. Default risk
B. Interest rate risk
C. Liquidity risk
D. Financial risk

Answer :

letmeanswer

Interest rate risk

Explanation:

The risk of interest rate is the risk posed by fluctuating interest rates for bond owners. How much interest rate risk a bond has depends on how priced it is sensitive to changing market interest rates. The vulnerability depends upon two factors, the maturity time of the bond and the bond yield.

Example of Interest Rate Risk

When, at a fixed rate, an investor invests an investment in a bond that gives him a discount rate of 5%, and then interest increases to 6%, the bond price will decline.

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