On January 1st, a borrower takes out a 5/1 ARM for 20 years bearing an initial APR of 5.5%. Thereafter, during the loans adjustable period, interest will be 2.5% over CPI, adjusting annually.

(a) How does this 5/1 ARM protect the lender from risk? (3 points)

(b) If the CPI on January 1st is 6%, what is the interest rate during the loans first year? (3 points)

(c) If the borrower was also offered a 10/1 ARM (as an alternative to the 5/1 ARM), how would the margin of the 10/1 ARM likely differ from the margin of the 5/1 ARM? (3 points)