First of all, calculate your initial monthly payment for this loan based on the teaser rate. Secondly, if you are still in the loan after five years, what will your new rate AND payment adjust to if the 1-year LIBOR at that time is 3.1%

First of all, calculate your initial monthly payment for this loan based on the teaser rate. Secondly, if you are still in the loan after five years, what will your new rate AND payment adjust to if the 1-year LIBOR at that time is 3.1%

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter19: Lease And Intermediate-term Financing

Section: Chapter Questions

Problem 9P

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Concept explainers

Present Value

Present value (PV) is defined as the current or present value of all future sums of cash flow or money at a specified rate of return. This rate of return is known as the discounted rate, which is essentially the interest rate, discounted over some time. The expected cash flows are discounted at a discount rate to compute the present value. The higher the discount rate, the higher the future value (FV), but the lower the present value.

Question

You are purchasing a condominium for $120,000 and will put a down payment on the condo sufficient to make it a 75% LTV. You do not envision living in the condo for more than 5 years so you are thinking of pursuing a 5/1 ARM that has a 2/6 min/max feature, a teaser rate of 3.25%, a floor equal to the teaser rate, a 30-year amortization period, a margin of 3.25 and an index based on the 1-year LIBOR. First of all, calculate your initial monthly payment for this loan based on the teaser rate. Secondly, if you are still in the loan after five years, what will your new rate AND payment adjust to if the 1-year LIBOR at that time is 3.1%?

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