Armando is buying a house worth 500, 000, and must decide whether to take on a xed or adjustable rate mortgage (ARM). The term of the loan is T = 15 years, with n = 12 monthly payments per year.

(a) Let the xed interest rate be r = 0.04. Calculate Armando's monthly payment.

(b) Suppose that the ARM has a starter rate of =0.03, guaranteed for at least the rst 5 years. Calculate Armandos initial monthly payment.

(c) Now suppose that after 5 years, the rate jumps to =0.06. Calculate Armandos new monthly payment, making sure to account for the payments that he has already made.

(d) Now suppose that after 10 years, the rate jumps again to =0.09. Note that this would make the loan rather generous by the standards of ARMs, whose rates typically adjust as frequently as every month. Calculate Armandos monthly payment now.

(e) To evaluate whether he made the right decision, Armando considers discounting payments he made under the ARM using the xed mortgage rate of r = 0.04. By this metric, was it a good idea to choose the ARM?

(f) Assessing that the rate adjustments reected uctuations in the market rate over the life of the loan, Armando now considers discounting the payments he would have made under the xed rate mortgage using the ARM rates. By this metric, was the ARM the right choice?