2. (6 points) a. Given the following information, which ARM should have the lowest initial interest rate? ARMI ARM2 ARM3 % Margin above index 3% 2% 3% Adjustment Interval 6 months 1 year 1 year Interest Rate Cap None 1% per year None (The three ARMs are identical in all other aspects) Briefly explain your answer! (2points) b. Suppose you make $65,000/year. You want to purchase a $300,000 house with a 90% LTV loan. The current 30-year FRM interest rate is at 6.5%. Your monthly insurance and property tax payment add up to $250. The lender allows a maximum Total Housing Expenses to Income rate of 35%. Will you qualify for this loan? (2 points) c. NCP bank extend a $400,000, 20-year mortgage at 5%. The interest rate increases to 6% soon after origination. Suppose the loan is expected to be prepaid in 9 years. What is the loss (interest rate risk) to the bank from the mortgage? (2 points)