In this problem, you are being asked to calculate the effective borrowing cost (rate) of an adjustable rate mortgage assuming you live in the house till the loan matures under the following eight (8) scenarios in excel:

1. Index rises 1/4% every year

2. Index rises 1/2% every year

3. Index rises 3/4% every year

4. Index rises 1% every year

5. Index rises 2% every year

6. Index falls 1/4% every year

7. Index falls 1/2% every year

8. No change in index

A description of the 1-year ARM with monthly payments is as follows:

Amount: $100,000 Maturity: 15 years

Points: 2

Closing Costs: 4%

Initial Contract Rate (teaser): 6.75%

Margin: 125 bps (1basis point = 0.01%)

Current Index Yield: 4%

Caps and Floors: Annually: 1%, Lifetime: 5%