Suppose that you are considering taking out an adjustable-rate mortgage with the following terms:

Amount borrowed: $125,000

Index rate: Prime Rate (Currently 5.5%)

Margin: 225 basis points

Periodic cap: 2.0 percentage points

Lifetime cap: 4.0 percentage points

Amortization: 30 years

a. What will the initial monthly payment be for this loan?

b. If the loans interest rate adjusts every year and the prime rate falls to 4.75% by the end of the first year, what will your payment be in the second year of this loan?

c. What is the highest interest rate that the lender could charge over the life of the loan?