John is considering an adjustable rate mortgage loan with the following characteristics:

Loan amount: $400,000

Term: 30 years

Index: one year T-Bill

Margin: 2%

Periodic cap: 2%

Lifetime cap: none

Negative amortization: not allowed

Financing costs: 1% origination fee and 2 points.

The Treasury bill yield is 4% at the outset and is expected to increase to 6% at the beginning of the second year and to 11% at the beginning of the third year. If John pays off the loan at the end of the third year, what is the ARMs effective borrowing cost?

PART A- What is the monthly payment during the second year?

a. $ 2,398.20

b. $ 2,923.44

c. $3,476.22

d. $4,523.68

e. None of the above

PART B- What is the loan balance at the end of the third year? a. $388,796

b. $389,268

c. $389,997

d. $392,985

e. None of the above

PART C- What is the effective borrowing cost? a. 9.62%

b. 9.81%

c. 9.89%

d. 9.03%

e. 9.60%