1. A borrower can get a mortgage for $400,000 over 30 years with the following terms:

a. Initial interest rate = 4%

b. Index = 1 year Treasuries

c. Payments adjusted annually

d. Margin = 2%

e. Negative amortization = yes

f.Based on forward rates the index is forecasted as follows:

Beginning of year BOY2=3%, BOY3=5%, BOY4=6%, BOY5=8%

Compute the payments, loan balances, and the cost of borrowing over a 5-year period.

2. Consider the information from the problem above. Compute the payments, loan balances, and cost of borrowing over a 5-year period if there is a 1% annual interest rate cap on the loan.

Excel solutions will do, calculator solutions is best.