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Consider a 1-year 1/29 ARM with amortization Principal borrowed=$500,000 Number of monthly payments=360 Index =0.5*1-year LIBOR rate+ 0.5*1-year T-note rate Margin=2% Initial annual mortgage rate=6%

Consider a 1-year 1/29 ARM with amortization

Principal borrowed=$500,000 Number of monthly payments=360 Index =0.5*1-year LIBOR rate+ 0.5*1-year T-note rate Margin=2% Initial annual mortgage rate=6% (initial LIBOR rate=initial T-note rate=4%) (So initial monthly mortgage rate=0.5%) Periodic interest-rate adjustment cap=2% Lifetime interest-rate adjustment cap=6% Payment cap=25%

a) What is the monthly payment during the 1st year of the loan? (6 points) b) At the beginning of the 2nd year, both the 1-year LIBOR rate and the 1-year T-note rate rise to 7%. What is the monthly payment during the 2nd year of the loan?

c) Both the 1-year LIBOR rate and the 1-year T-note rate stay at 7% during the 3rd year of the loan. What is the monthly payment during the 3rd year of the loan?

d) Is the lifetime interest-rate adjustment cap or the payment cap reached?

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