| Course | FIN-3310 Financial Institutions and Markets |
|---|---|
| Module | Module 5 |
| Paper type | Written assignment 5: mortgage and foreign exchange markets |
| Length | About 597 words, 5 pages |
| Format | APA 7 student paper |
| School | Thomas Edison State University |
| Program | B.S.B.A. in Finance |
| Updated | October 2026 |
Free sample paper for FIN 3310 Module 5
Thirty Years or Fifteen, Dollars or Euros: Mortgage and Exchange Rate Decisions
Student Name
B.S.B.A. in Finance, Thomas Edison State University
FIN-3310: Financial Institutions and Markets
Mentor Name
Month Day, Year
Thirty Years or Fifteen, Dollars or Euros: Mortgage and Exchange Rate Decisions
Choosing a Mortgage
A member wants to borrow $360,000 to buy a home. The credit union offers two fixed-rate loans. Akerlof (1970) showed how hidden information about quality can shrink a market, the problem that standardized underwriting and guarantees address in secondary mortgage markets.
The 15-year loan saves nearly $294,000 of interest because the balance falls faster and the rate is lower, the lender charging less for shorter interest rate risk. Its payment, however, is about $703 a month higher. The right choice depends on the member's budget: the 30-year loan leaves room for retirement saving and emergencies, and the member can still prepay. An adjustable-rate mortgage would start at a lower rate but shift interest rate risk to the borrower, which suits someone who expects to move within a few years (Mishkin & Eakins, 2018).
| 30-year fixed | 15-year fixed | |
|---|---|---|
| Rate | 6.75% | 6.00% |
| Monthly payment | $2,334.95 | $3,037.88 |
| Total interest over the loan | $480,583 | $186,819 |
The Secondary Market and Securitization
The credit union cannot hold every 30-year mortgage it makes without taking on large interest rate risk, since its deposits reprice quickly. It can sell conforming mortgages to Fannie Mae or Freddie Mac, which pool them into mortgage-backed securities sold to investors, or keep servicing them for a fee. Securitization frees the credit union's capital to make new loans and moves interest rate risk to investors better able to bear it.
Securitization also played a central role in the 2008 crisis. Lenders who sold loans immediately had less reason to screen borrowers carefully, a moral hazard problem, and complex private-label securities built from subprime loans received high ratings. In the years before 2007, Mian and Sufi (2009) showed, mortgage lending grew fastest in neighborhoods whose incomes were barely rising, followed by the highest default rates when house prices fell. Reforms since then, including the Dodd-Frank Act's ability-to-repay rule for borrowers and risk retention requirements for issuers, were designed to restore the incentive to underwrite carefully.
Exchange Rate Determination
In the long run, the theory of purchasing power parity holds that exchange rates adjust to equalize the price of goods across countries, so a country with higher inflation sees its currency depreciate. In the short run, exchange rates behave like asset prices, moving with expected returns on deposits in each currency, which depend on interest rates and expected exchange rate changes.
Covered Interest Parity
Take a spot rate of $1.10 per euro and a one-year U.S. rate is 4.5 percent while a one-year euro deposit pays 2.5 percent. Covered interest parity requires that an investor earn the same return by investing in dollars or by converting to euros, investing at the euro rate and selling the euros forward:
Forward rate = Spot × (1 + iUS) / (1 + iEUR) = $1.10 × 1.045 / 1.025 = $1.1215 per euro.
Priced one year ahead, the euro costs about 2 percent more than today, offsetting the 2-point interest advantage of dollar deposits. If the forward rate were higher, investors could earn a riskless profit by borrowing dollars, investing in euros and selling euros forward, and that arbitrage would push the rates back into line.
Implications for the Credit Union
Mortgage markets shape what the credit union can offer members: selling conforming loans lets it offer 30-year fixed rates without taking on their interest rate risk. Foreign exchange matters less to a domestic credit union, but members traveling or sending money abroad face these rates, and the credit union's pricing of currency services should reflect the market's interest differentials.
References
Akerlof, G. A. (1970). The market for "lemons": Quality uncertainty and the market mechanism. Quarterly Journal of Economics, 84(3), 488-500. https://doi.org/10.2307/1879431
Mian, A., & Sufi, A. (2009). The consequences of mortgage credit expansion: Evidence from the U.S. mortgage default crisis. Quarterly Journal of Economics, 124(4), 1449-1496. https://doi.org/10.1162/qjec.2009.124.4.1449
Mishkin, F. S., & Eakins, S. G. (2018). Financial markets and institutions (9th ed.). Pearson.
Reading the FIN 3310 Module 5 assignment instructions
Mortgages and currencies share the fifth module. Expect questions on mortgage types, payments and costs, the secondary mortgage market and securitization, the 2008 crisis and exchange rate determination, including purchasing power parity and interest parity. The lemons problem from Module 2 helps explain why securitization weakened screening. The member, rates and exchange rate here are illustrative composites rather than current quotes. Expect questions on mortgage types, securitization and the 2008 crisis, together with exchange rate determination. Some versions ask how a change in U.S. rates affects the dollar. Expect questions on fixed and adjustable mortgages, securitization and the secondary market, and on exchange rate determination, including interest rate parity and the factors that move currencies.
Inside the FIN 3310 Module 5 example
The paper compares two mortgages in a table and explains the trade-off between total interest and monthly payment, adding adjustable-rate loans. The secondary market section explains securitization's benefits and its role in the crisis, with research on default patterns and the reforms that followed. The exchange rate section contrasts long-run purchasing power parity with short-run asset-market behavior, and a worked covered interest parity example derives a forward rate and explains the arbitrage that enforces it. The mortgage section explains how securitization spread risk and how it contributed to the crisis. The foreign exchange section applies parity to a recent currency move.
Reading the FIN 3310 Module 5 grading rubric
The mortgage and currency paper is judged on correct parity arithmetic and a sound recommendation to the member and the credit union. Mentors look for correct mortgage calculations, an accurate account of securitization including its risks, a correct explanation of exchange rate determination and a correct parity calculation. Balancing the benefits of securitization against its role in the crisis, and explaining the arbitrage behind interest parity, show the understanding expected of a finance major. Mentors give credit for accurate mortgage calculations and for explaining exchange rates with interest parity or purchasing power parity. Clear links between rates and exchange rates show integration. Showing the mortgage arithmetic step by step allows partial credit for small slips.
Common FIN 3310 Module 5 mistakes, and how to avoid them
Answers in this module lose points for comparing mortgages on rate alone, for describing securitization without its moral hazard problem and for writing the interest parity formula upside down. Compute payments and total interest for each mortgage. Explain who bears interest rate risk in each type. Write out covered interest parity with the quotation convention stated. Explain the arbitrage that keeps it in line. A free first sample of your own FIN-3310 Module 5 assignment is available on request. Show the payment calculation for any mortgage you compare, and say which parity condition you are using. Explain who gained and who lost from securitization. Date every exchange rate you cite. Keep the two halves of the answer clearly separated.
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FIN 3310 Module 5 questions, answered
Where can I find a free FIN 3310 Module 5 sample paper?
The credit union paper above compares 30- and 15-year mortgages, explains securitization and the 2008 crisis and computes a forward rate with covered interest parity.
Why does a 15-year mortgage cost less in total interest?
Its balance falls faster and its rate is usually lower, so far less interest accrues over the loan.
What is mortgage securitization?
Pooling mortgages and selling securities backed by their payments to investors, which frees lenders' capital and shifts risk.
What is covered interest parity?
The condition that the forward exchange rate equals the spot rate adjusted by the ratio of the two countries' interest rates.
What is purchasing power parity?
The theory that exchange rates adjust over time so the same goods cost the same across countries.