On January 1 ", a borrower takes-out a 5/1 ARM for 20 years bearing initial APR of 5.5 %. Thereafter, during the loan's adjustable period, interest will be 2.5 % over CPI, adjusting annually. (a) How does this 5/1 ARM protect the lender from risk? (b) If the CPI on January 1"is 6 %, what is the interest rate during the loan's first year? (c) If the borrower was also offered a 10/1 ARM (as an alternative to the 5/1 ARM), how would the margin of the 10/1 ARM likely differ from the margin of the 5/1 ARM?
On January 1 ", a borrower takes-out a 5/1 ARM for 20 years bearing initial APR of 5.5 %. Thereafter, during the loan's adjustable period, interest will be 2.5 % over CPI, adjusting annually. (a) How does this 5/1 ARM protect the lender from risk? (b) If the CPI on January 1"is 6 %, what is the interest rate during the loan's first year? (c) If the borrower was also offered a 10/1 ARM (as an alternative to the 5/1 ARM), how would the margin of the 10/1 ARM likely differ from the margin of the 5/1 ARM?
Chapter9: Accounting For Receivables
Section: Chapter Questions
Problem 21MC: A customer takes out a loan of $130,000 on January 1, with a maturity date of 36 months, and an...
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2) On January 1 ", a borrower takes-out a 5/1 ARM for 20 years bearing initial APR of 5.5 %. Thereafter, during the loan's adjustable period, interest will be 2.5 % over CPI, adjusting annually.
(a) How does this 5/1 ARM protect the lender from risk?
(b) If the CPI on January 1"is 6 %, what is the interest rate during the loan's first year?
(c) If the borrower was also offered a 10/1 ARM (as an alternative to the 5/1 ARM), how would the margin of the 10/1 ARM likely differ from the margin of the 5/1 ARM?
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