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 a 3% adjustment cap per adjustment period, with an 8% lifetime adjustment. The rate is 4% over the one-year LIBOR, which is currently 1.25%.

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

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

c. If the 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?