Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Lary is considering an ARM loan offered by a local lender. The loan amount is $300,000. The term of the loan is 10 years. The

Lary is considering an ARM loan offered by a local lender. The loan amount is $300,000. The term of the loan is 10 years. The index today is 2%. The margin on the loan is 2%. The teaser (first year only) is 1%. The composite rate adjusts annually and is subject to annual and lifetime caps of 2% and 5%. The loan does not provide for negative amortization nor does it provide floors. The loan requires 2 points at origination. The prevailing rate in the market for similar FRM loans is 6.25%. Assume the following forecast of index rates. What is the amount of the payment due in each of months 37 through 48?

Hint: Don't reinvent the wheel to answer this question. Look for resources in the Modules that can greatly reduce the time required to calculate the answer.

Year Index Rate Forecast
0 2.00%
1 2.25%
2 2.50%
3 3.10%
4 4.15%
5 7.50%
6 5.50%
7 7.50%
8 8.00%
9 7.10%

B) What is the expected yield to the lender at origination from Lary's ARM loan assuming no prepayment?

C) At the start of year 2, what is the market value of Lary's ARM loan at a required yield of 5.5% assuming no prepayment?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Corporate Finance A Focused Approach

Authors: Michael C. Ehrhardt, Eugene F. Brigham

8th Edition

0357714636, 9780357714638

More Books

Students also viewed these Finance questions

Question

Be able to cite the advantages of arbitration

Answered: 1 week ago