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CFA Level I · CFA Level I Exam · Fixed-Income Securitization

A lender grants a residential mortgage loan in which the borrower makes level payments that cover interest and principal so that the balance reaches zero at maturity. Compared with an interest-only mortgage, the fully amortizing loan is most likely to:

A fully amortizing mortgage has no refinancing risk at maturity because level payments repay all principal by the final date, leaving no balloon payment. Interest-only and partially amortizing loans leave a balance that must be repaid or refinanced.

  1. Ahave no refinancing risk at maturityCorrect
  2. Bcarry a larger balloon payment at maturity
  3. Chave a higher outstanding balance after five years

Explanation

A fully amortizing loan repays principal over its life, so no balance remains at maturity and there is no balloon payment to refinance. An interest-only loan keeps the balance unchanged for the interest-only period, so its balance after five years is higher, not lower. A balloon payment belongs to partially amortizing loans.

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