CMA Interest Rates & Economic Factors 2

Question 1

Which Federal Reserve tool most directly influences short-term interest rates in the US?

Accepted Answer

Federal funds rate target

Answer

The federal funds rate target set by the FOMC is the primary benchmark that directly steers short-term borrowing costs throughout the economy.

Question 2

When the yield curve inverts, what does it signal about the economy?

Accepted Answer

Potential recession in 6–18 months

Answer

An inverted yield curve, where short-term yields exceed long-term yields, has historically been a reliable predictor of economic recession within roughly 6–18 months.

Question 3

A borrower is choosing between a 5/1 ARM at 5.5% and a 30-year fixed at 6.25%. If rates are expected to rise significantly after 5 years, which is the better long-term choice?

Accepted Answer

30-year fixed, because it locks in today's rate before increases

Answer

When rates are expected to rise significantly after the fixed period, a 30-year fixed mortgage protects the borrower from future payment shock.

Question 4

Which economic indicator is most closely watched as a leading predictor of mortgage application volume?

Accepted Answer

10-year Treasury yield

Answer

The 10-year Treasury yield is the benchmark most directly tied to 30-year fixed mortgage rates, making it the primary leading indicator for mortgage volume.

Question 5

What is the relationship between inflation expectations and long-term mortgage rates?

Accepted Answer

Higher inflation expectations push long-term rates up

Answer

Lenders demand higher nominal interest rates when inflation expectations rise to preserve the real return on their loan investment.

(CMA) Certified Mortgage Advisor Practice Test

(CMA) Certified Mortgage Advisor Practice Test

CMA Interest Rates & Economic Factors 2