### What is the Treasury Index primarily used for? - [x] To determine the rate on an adjustable-rate mortgage - [ ] To set the fixed interest rate on long-term loans - [ ] To measure inflation in the economy - [ ] To benchmark stock market performance > **Explanation:** The Treasury Index is most often used to determine the interest rate on an adjustable-rate mortgage (ARM). The rate on an ARM fluctuates, and the Treasury Index is one of the common indicators used by lenders to adjust these rates annually based on what the federal government pays its investors for Treasury bills. ### How does the Treasury Index affect an adjustable-rate mortgage (ARM)? - [ ] It determines the fixed rate for the mortgage - [x] It causes the mortgage rate to fluctuate based on federal government payments to investors - [ ] It ensures that the mortgage rate remains the same over time - [ ] It sets a floor on the lowest possible mortgage rate > **Explanation:** The mortgage rate on an ARM fluctuates because it is indexed to some outside indicator like the Treasury Index. When the Treasury has to pay more to attract investors to purchase Treasury bills, the corresponding rate on the ARM will rise, reflecting this increased cost. ### What can cause the Treasury Index to rise? - [x] An increase in rates for other safe investment vehicles like certificates of deposit - [ ] Decreasing interest rates set by the Federal Reserve - [ ] Increasing stock market indices - [ ] Lower consumer confidence > **Explanation:** When the rates on other safe investment options like certificates of deposit increase, the Treasury must offer higher rates for Treasury bills to attract investors. This increase in Treasury rates causes the Treasury Index to rise, influencing higher mortgage rates for ARMs. ### Why might lenders prefer using the Treasury Index for ARMs? - [ ] It offers the lowest possible rates to borrowers - [ ] It is less volatile compared to stock indices - [x] It reflects the cost of government debt, providing a stable and predictable benchmark - [ ] It is influenced by lender-specific factors > **Explanation:** Lenders prefer the Treasury Index because it reflects the cost of government borrowing and is a stable, predictable benchmark. This provides lenders with a reliable indicator for determining rates on ARMs, helping them to manage their risk effectively. ### Which of the following is a characteristic of the Treasury Index? - [x] It tends to reflect the availability of other safe investment vehicles - [ ] It is heavily influenced by the stock market performance - [ ] It generally remains static over time - [ ] It is only affected by internal lender policies > **Explanation:** The Treasury Index tends to reflect the comparative availability and rates of other safe investment vehicles like certificates of deposit. When these alternatives offer higher rates, the Treasury must also increase its rates to attract investors, thereby affecting the Index. ### How is the interest rate on an ARM typically adjusted? - [x] Based on the fluctuations in an underlying index such as the Treasury Index - [ ] Based on lender discretion every six months - [ ] By a fixed amount annually, regardless of market conditions - [ ] Tied directly to a borrower’s credit score > **Explanation:** The interest rate on an ARM is typically adjusted based on the fluctuations in an underlying index such as the Treasury Index. This allows the rate to change in response to broader economic conditions and the cost of government borrowing. ### Why might a borrower choose an adjustable-rate mortgage (ARM) indexed to the Treasury Index? - [ ] For always lower rates than a fixed-rate mortgage - [x] For potentially lower initial rates with adjustments tied to a stable benchmark - [ ] For complete predictability and no rate changes - [ ] To benefit directly from stock market gains > **Explanation:** A borrower might choose an ARM indexed to the Treasury Index because it often offers lower initial rates compared to fixed-rate mortgages, with future adjustments tied to a stable and widely accepted benchmark, providing both initial savings and a predictable adjustment mechanism. ### How does a higher Treasury Index rate impact borrowers with ARMs? - [ ] It decreases their monthly mortgage payments - [x] It increases their monthly mortgage payments - [ ] It prevents any changes in monthly payments - [ ] It converts their mortgage to a fixed rate > **Explanation:** A higher Treasury Index rate results in increased borrowing costs for the federal government, which in turn raises the interest rates on ARMs indexed to this metric, leading to higher monthly mortgage payments for borrowers. ### What happens if the rates on certificates of deposit increase significantly? - [x] The Treasury will have to pay more to attract investors, raising the Treasury Index - [ ] The Treasury Index will decrease - [ ] ARM rates will remain unchanged - [ ] The federal government's borrowing costs decline > **Explanation:** If rates on certificates of deposit increase significantly, the Treasury will need to offer higher rates to attract investors to purchase Treasury bills. This increase will raise the Treasury Index, affecting the rates on ARMs indexed to it. ### Why is the Treasury Index a commonly used benchmark for ARMs? - [ ] It offers the highest returns for investors - [ ] It is determined by individual lenders - [x] It is a stable and reliable indicator of government borrowing costs - [ ] It has no relation to other investment vehicles > **Explanation:** The Treasury Index is a commonly used benchmark for ARMs because it provides a stable and reliable measure of government borrowing costs, which helps lenders manage their risk effectively and offer terms that reflect broader economic conditions.