Assume that a lender offers a 30-year, $148,000 adjustable rate mortgage (ARM) with the following terms:   Initial interest rate = 7.5 percent Index = one-year Treasuries Payments reset each year Margin = 2 percent Interest rate cap = 1 percent annually; 3 percent lifetime Discount points = 2 percent   Based on estimated forward rates, the index to which the ARM is tied is forecasted as follows: Beginning of year (BOY) 2 = 7 percent; (BOY) 3 = 8.5 percent; (BOY) 4 = 9.5 percent; (BOY) 5 = 11 percent.   Required:   a. Compute the payments and loan balances for the ARM for the five-year period.   b. Compute the yield for the ARM for the five-year period.

EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter19: Lease And Intermediate-term Financing
Section: Chapter Questions
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Assume that a lender offers a 30-year, $148,000 adjustable rate mortgage (ARM) with the following terms:

 

Initial interest rate = 7.5 percent

Index = one-year Treasuries

Payments reset each year

Margin = 2 percent

Interest rate cap = 1 percent annually; 3 percent lifetime

Discount points = 2 percent

 

Based on estimated forward rates, the index to which the ARM is tied is forecasted as follows: Beginning of year (BOY) 2 = 7 percent; (BOY) 3 = 8.5 percent; (BOY) 4 = 9.5 percent; (BOY) 5 = 11 percent.

 

Required:

 

a. Compute the payments and loan balances for the ARM for the five-year period.

 

b. Compute the yield for the ARM for the five-year period.

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