Question
An Adjustable Rate Mortgage (ARM) for $100,000 is made for 20 years and payments will be made monthly with the following terms: Initial interest rate:
An Adjustable Rate Mortgage (ARM) for $100,000 is made for 20 years and payments will be made monthly with the following terms: Initial interest rate: 4 percent Index: 1 year treasuries Payments reset each year Margin 2 percent Interest rate cap: None Payment cap: 5 percent increase in any year Discount points: 2 percent Fully amortizing, however, negative amortization allowed if payment cap reached. Based on estimated forward rates, the index to which the ARM is tied is forecasted as follows: Beginning of year (BOY) 2: 5%, and (BOY) 3: 6%. Compute the payments, loan balances, and yield for the ARM for the three year period. You should fill the empty places on the table. In case you dont have a financial calculator, you can use capital letters and show how you calculate each of the empty places. Year BOY Balance Uncapped Rate Payment Uncapped Payment Capped EOY Balance
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