Assume that the lender is offering a $L, 30-year fully amortizing ARM at 1.80% margin (180 basis points) over the 1-Year Treasury Rate and 3.0000 (discount) points. The initial mortgage interest rate is fixed at 4.30% for the first year, the adjustment period is one year, and there is a cap of 12.50% increase in monthly payment in any year. The current (BOY1) 1-year Treasury Rate is Y%, and the expected 1-Year Treasury Rate one year from now is 5.82% (BOY 2). Loan terms dictate that interest will accrue according to the pertinent composite or market rate and any teaser rate or payment cap related shortfall will be treated in the manner of negative amortization. There is a 2.8000% prepayment penalty on the balance due at the time of prepayment. The lender expects the borrower to prepay at the end of two years (end of Month 24). The lender requires All-in or Effective Yield of 11.40%. Under the interest rate scenario above, the Interest Shortfall per Month in Year 1 is $199.79, and the Payment Cap will apply in Year 2 with the Capped Monthly Payment in Year 2 being $2,894.86.

(a) What is the Initial (Time 0) Mortgage Loan Balance? __________

(b) What is the current (BOY1) 1-year Treasury Rate, rounded to two decimal places? __________

(c) What is the EOY2 (End of Year 2) Loan Balance, before prepayment penalty? __________

(d) Under the given loan terms, what is the IRR%, rounded to two decimal places, for the lender? _________

(e) Other terms remaining the same except Prepayment Penalty%, what prepayment penalty% (rounded to four decimal places) should the lender charge to earn the required All-in or Effective Yield? __________

especiallyfor (e)