Give a $50,000 mortgage

with an initial teaser rate of 5%,

and a 2.5% margin,

with a 2% annual interest rate cap,

Assume a 30 year mortgage.

The index is the one year T Bill rate.

If a 1% origination fee is charged, find the yield IRR if the loan is held for two years using the following procedure.

use the cash flow mode on your calculator or an excel spreadsheet.

First find the loan balance at the end of year two.

The enter the cash flows beginning with the first as a negative amount-$49,500 CFo

Then enter 12 cash flows - (CF1 through CF 12) which are the monthly payments for year 1.

The enter 11 cash flows (CF 13- CF23)which are the monthly payments made in year 2.

Then enter the final cash flow (CF 24) which is the sum of the loan balance and the last monthly payment.(Note, that these two amounts occur on the same month which is actually the 24^th payment.

Then solve for the IRR.The answer will be a monthly rate so you will need to multiply it by 12 to convert to an annual rate.