Question

Conservative Bank offers loans at various interest rates, depending on the nature of the loan. Jake wants to borrow $200,000 for a new home. He promises to pay back the loan in 10 years. Alyssa also wants to borrow $200,000 for a new home. She promises to pay back the loan in 15 years. Assume Jake and Alyssa are equally creditworthy and that the two home mortgages are the same in all other aspects. If all else is constant, the bank would most likely charge a higher interest rate to___.

Answer 1

Answer:

Bank would most likely charge a higher interest rate to Alyssa

Explanation:

Credit worthiness of Jake and Alyssa is same and interestingly amount is also same. But Alyssa is taking it for long period of time say, 15 years while Jake will return in 10 years. Bank decides the interest rate based on the economic conditions. Short term loan are given at lower rate because it is easy to predict the future. But here in both cases, loans are taken for long period. But still Alyssa period is greater than Jake. Thus, bank will charge higher interest rate from Alyssa.