Question # 1 (10 Points): Assume that the lender is offering a $L, 25-year fully amortizing ARM at 2.30% margin (230 basis points) over the 1-Year Treasury Rate and 4.0000 (discount) points. The adjustment period is one year. The initial teaser mortgage interest rate% and loan balance are such that the monthly payment for Year 1 is set at $4,045.49. There is a cap of 8.50% increase in monthly payment in any year. The current (BOY1) 1-year Treasury Rate is 6.00%, and the expected 1-Year Treasury Rate one year from now is 7.10% (BOY 2). Loan terms dictate that interest will accrue according to the pertinent composite or market rate and any teaser rate or payment cap related shortfall will be treated in the manner of negative amortization. There is a 4.5000% prepayment penalty on the balance due at the time of prepayment. The lender expects the borrower to prepay at the end of two years (end of Month 24). The lender requires All-in or Effective Yield of 14.10%. Under the interest rate scenario above, the Interest Shortfall per Month in Year 1 is $381.51, and the Payment Cap will apply in Year 2.

(a) What is the Initial (Time 0) Mortgage Loan Balance? __________

(b) What is the initial teaser mortgage interest rate%, rounded to two decimal places? ______

(c) What is the EOY1 (End of Year 1) Loan Balance? __________

(d) Given the terms and information above, what is the All-In or Effective Yield, % rounded to two decimals, to the lender? _____

(e) To achieve the lenders required All-In or Effective Yield, what prepayment penalty, % rounded to 4 decimals, should be charged, holding all other terms the same? _____