Consider a $160,000 loan, 20-year amortisation ARM (variable rate) with monthly payments and annual interest rate adjustments. The initial interest rate is 6.5%. The index for the loan is one-year government bonds, currently yielding 4.75%. The loan has a margin of 250 basis points and interest caps of 2% per year at each adjustment and 4% over the life of the loan. It is expected that one-year bond yields will increase to 6.35% over the second year (at the end of Year 1) and to 8% during Year 3 (at the end of Year 2).

Compute the monthly payments and balances over the first three years. (8 Marks)

Please provide step-by-step solution, thank you.