5. You are looking to finance your home. The bank is offering a three-year ARM (adjustable-rate mortgage)

with an introductory rate of 3.5%. It has an adjustment cap of 3% per adjustment period, with a lifetime adjustment of 8%. The rate is 4% over the one-year LIBOR rate, which is currently 1.25%. (LO 7-3)

a. What will your interest rate be after three years if the LIBOR rate does not change?

b. In three years, what is the maximum interest rate you could be charged?

c. If LIBOR increases 1% per year for the next 10 years, up to 11.25%, what is the maximum interest rate you will pay? When will that rate take effect?