In order to invest in a small inn in Val Mstair (CH, GR), an investor contracts a CHF 5.6M ARM with 30-year monthly payments and annual interest rate adjustments.The teaser rate (1st year only) is 2%. Annual cap is 3%, and lifetime cap is 5.8%. The index for the loan is the LIBOR, and the loan has a margin of 180 basis points.It is expected that the LIBOR will increase by 1.8% on the second year (at the end of Year-1), and by another1.2% on the third year (at the end of Year-2).Current Yield on Libor is 3.15%. The loan is prepaid in 3 years.

Assume the initiatial costs of 1.5 point (for loan issuance), and there is a 2.5% prepayment penalty.

FInd:

PV after borrowing cost adjustments

3rd year Balance after pre-payment penalty adjustment

EBC (assuming pre-payment after 3 years)