DO NOT USE EXCEL OR FINANCIAL CALCULATOR

A basic ARM is made for Sh. 200,000 at an initial rate of 6% p.a, for 30 years with an annual reset date. The borrower believes that the interest rate at the beginning of year 2 will increase to 7% p.a. (a) Assuming that a fully amortizing loan is made, what will monthly payments be during year 1? (5 marks) (b) Based on (a) above what will the lean balance be at the end of year 1? (5 marks) (c). Given that the interest rate is expected to be 7% at the beginning of year 2, what will monthly payments be during year 2? (5 marks) (d). What will the loan balance be at the end of year 2? (5 marks) (e) What would be the monthly payments in year 1 if they are to be interest only (3 marks) 1 A basic ARM is made for Sh. 200,000 at an initial rate of 6% p.a, for 30 years with an annual reset date. The borrower believes that the interest rate at the beginning of year 2 will increase to 7% p.a. (a) Assuming that a fully amortizing loan is made, what will monthly payments be during year 1? (5 marks) (b) Based on (a) above what will the lean balance be at the end of year 1? (5 marks) (c). Given that the interest rate is expected to be 7% at the beginning of year 2, what will monthly payments be during year 2? (5 marks) (d). What will the loan balance be at the end of year 2? (5 marks) (e) What would be the monthly payments in year 1 if they are to be interest only (3 marks) 1