Consider a $2 million, 30-year amortization ARM with monthly payments and annual interest adjustments. The initial interest rate is 6%. The index for the loan is one-year U.S. Treasury bonds, currently yielding 5.5%. The loan has a margin of 250 basis points.

a. Is the loans initial interest rate a teaser rate? How do you know?

b. If one-year T-bonds remain at 5.5%, what will be the applicable interest rate for this mortgage after the first year?

c. What are the initial monthly payments on this loan?

d. Assuming T-bonds remain at 5.5%, what will be the monthly payments after the first year?

e. Under that assumption (and assuming no discount points), what is the forecasted yield-to-maturity on this loan at the time it is issued, assuming it has no discount points?