Which formula represents the interest rate on an adjustable-rate mortgage (ARM)?

The formula that correctly represents the interest rate on an adjustable-rate mortgage (ARM) is the sum of the index rate and the margin.

In an ARM, the interest rate is typically linked to a specific index that reflects market interest rates. The margin is an additional percentage that the lender adds to the index rate to determine the overall interest rate charged to the borrower. This combination of index rate and margin ensures that the interest rate can fluctuate over time based on market conditions while also accounting for the lender's profit.

Understanding this formula is crucial for borrowers, as it helps them predict how their payments may change when the index rate varies. It's important to note that other options do not accurately capture how the ARM interest rate is calculated, such as the idea that it could be derived from adding or subtracting components incorrectly or including irrelevant factors like fixed rates or fees.