An ARM is originated with the following characteristics: 30 year term, fully amortizing, 5% initial interest rate, annual interest rate reset, 10 year LIBOR is the index, 2.5% margin. There is a 3.0% periodic cap and a 9.0% lifetime cap. At the first reset date, the 10 year LIBOR index is at 6%. What is the interest rate charged on this ARM during the second year of payments?

a. 5.0%

b. 6.0%

c. 8.0%

d. 8.5%

e. Cannot be determined without knowing loan amount

PLEASE SHOW YOUR WORK!