An increment above the prime rate on a floating-rate loan will be higher than on a fixed-rate loan of equivalent risk because the lender bears higher risk with a floating-rate loan.

Question

Quizplus · Accepted Answer

The increment above the prime rate on a floating-rate loan typically reflects the interest rate risk borne by the borrower rather than the lender, as the interest rate can fluctuate. In contrast, a fixed-rate loan locks in the interest rate, transferring interest rate risk from the borrower to the lender, potentially justifying a higher rate for equivalent risk due to the lender bearing this risk.

An Increment Above the Prime Rate on a Floating-Rate Loan