If the initial interest rate on an ARM is 4% below its fully-indexed rate, how is this rate best described?

The correct answer is a teaser rate, which is a promotional interest rate that lenders offer to attract borrowers. In the context of an adjustable-rate mortgage (ARM), the initial interest rate might be set significantly lower than the fully indexed rate to make the loan more appealing. This lower rate is temporary and typically lasts for a limited time before adjusting to the fully indexed rate based on the performance of an underlying index plus a margin.

The term "teaser rate" aptly describes this situation as it suggests a short-term benefit to entice consumers, but it may lead to higher payments in the future once the initial period ends. Although "discounted rate" could also describe a lower-than-market rate, it's not specific to the context of a temporary promotional rate associated with ARMs. "Bait rate" might imply a misleadingly low rate, but it's not a standard term in mortgage lending. The "margin rate," on the other hand, refers to the fixed component added to the index to determine the fully indexed rate and does not describe the initial promotional pricing structure.