Consider an adjustable rate mortgage (ARM) of $195,000 with a maturity of 30 years and monthly payments. At the end of each year, the interest rate is adjusted to become 2.5 percentage points above the index. There is an annual cap of 250 basis points, and a lifetime cap of 500 basis points (i.e., with 2.5/5 interest rate caps). The lender offers a teaser of 2.00% for the first year.

The following are the current and index rates: Time T-Bill Yield (given) At origination (for yr 1) 4.50% At end of yr 1 (for yr 2) 8.50% At end of yr 2 (for yr 3) 9.00% At end of yr 3 (for yr 4) 5.00% At end of yr 4 (for yr 5) 8.00% #1).

What is the contract rate for years 1, 2, and 3? Choose the BEST answer