A buyer is unfamiliar with the concept of discount points and asks a licensee to explain. The licensee responds " Discount points are used to replace funds that are being held by the Federal Reserve, so that more funds are available to lend." Is that description correct?
A. No, discount points are used to increase yield for lenders who will sell the loans on the secondary market
B. No, discount points are used to pay brokers' commissions
C. Yes, banks hold discount points in escrow until sufficient funds have been accumulated to make more loans
D. Yes, discount points lower interest rates, which make loans more affordable for everyone
Answer: A. No, discount points are used to increase the yield for lenders who will sell the loans on the secondary market.
Discount points are paid to a lender in order to increase the lender's upfront yield on a loan. Typically, the lender will compensate for this by charging a below-market interest rate.
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