1.Suppose you considering an ARM with the following characteristics:

Mortgage amount

$2,000,000

Index

1-year Treasury Bill yield

Margin

2.50

Maximum annual adjustment

2%

Lifetime interest cap

6%

Discount points

2.00

Loan maturity

30 years

a.If the Treasury Bill yield is currently 6 percent, what is the monthly payment for the first year?

b.If the index moves to 7.5 percent at the end of the first year, what is the monthly payment for year 2.

c.If the loan is paid off at the end of year 2, what is the effective cost (yield)?