You are borrowing a 30-year adjustable mortgage loan for $400,000 with an initial interest rate of 5.0%, indexed to a 1-year Treasury rate with a margin of 2%. The interest rate will be adjusted annually.

a. Calculate the monthly payment for the first year. In ARM contracts, the monthly payments are calculated assuming that the current interest rate stays the same until maturity.

b. At the start of year 2, the one-year Treasury rate is 4.5%. The new interest rate for the loan will be 6.5% (= 4.5% + 2%). Calculate the monthly payment for the second year. (Note that the remaining maturity is 29 years. The present value of all the remaining payments for 29 years should equal to the current loan balance.)