You and your sister have decided to invest in a retail unit. You have decided to obtain an adjustable rate mortgage (ARM). You anticipate to sell the unit after five years. The lender offers you a $4,275,000, 15-year ARM with the following terms: Initial interest rate = 3 percent Index = 1-year Treasuries Payments adjusted each year Margin = 2 percent Interest rate cap = 2 percent annually; 5 percent lifetime Discount points = 2 percent

Based on estimated forward rates computed from the yield curve on U.S. Treasury bills, the index to which the ARM is tied is forecasted as follows: end of year (EOY) 1 = 3.5 percent; EOY 2 = 4.5 percent; EOY 3 = 7 percent; EOY 4 = 7.5 percent. Compute the payments, loan balances, and yield for the ARM for the five-year period.