SOFE Exam AFE Topic 1 Question 55 Discussion

Actual exam question for SOFE's AFE exam

Question #: 55
Topic #: 1

[All AFE Questions]

Prepayment of a conventional mortgage loan, prior to its specified maturity, is discouraged through the general market acceptance of significant prepayment penalties. Often these penalties are calculated so that when prevailing market interest rates are:

ALower than the rate on the loan being repaid the borrower has to make up the interest rate differential and the lender is essentially ''made whole'' for a potential loss of interest.

BGreater than the rate on the loan being repaid the borrower has to make up the interest rate differential and the lender is essentially ''made whole'' for a potential loss of interest.

CEqual to the rate on the loan being repaid the borrower has to make up the interest rate differential and the lender is essentially ''made whole'' for a potential loss of interest.

DLower than the rate of interest being paid to the borrower has to make up the interest rate differential and the lender is essentially ''made whole'' for a potential loss of interest.

Show Suggested Answer

Suggested Answer: D

by Gilma at Mar 21, 2023, 08:16 PM

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Sharen

47 minutes ago

Okay, let me think this through. If market rates are lower, the borrower has to make up the difference to keep the lender happy. Sounds like a win-win for the lender!

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Staci

5 days ago

Hmm, interesting. So the lender wants to be compensated for any potential loss of interest when the borrower pays off the loan early. Gotta love those prepayment penalties!

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Belen

13 days ago

Aha! The correct answer is B. When the prevailing market interest rates are greater than the rate on the loan being repaid, the borrower has to make up the interest rate differential to keep the lender 'made whole'.

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Merilyn

16 days ago

That's an interesting perspective, Fausto. I can see your point. But I still think A makes more sense in this scenario.

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Fausto

17 days ago

I disagree, I believe the answer is B. The borrower has to make up the interest rate differential when prevailing market interest rates are greater than the rate on the loan being repaid.

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Merilyn

25 days ago

I think the answer is A, because the borrower has to make up the interest rate differential when prevailing market interest rates are lower than the rate on the loan being repaid.

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