You are given that the teaser rate on a 1/1 ARM is 2.50%. The mortgage has a margin of 2% above 1-year CMT, subject to a rate cap 5/2/5. Answer the following questions:

(i) What is the maximum rate the mortgage can reset to on its first reset date?

(ii) The CMT is 2% at the time of the first reset and at the time of the second reset it goes to 3.5%. What would the rate reset to for the third year? (*Please not that the first reset rate applies to the second year payments and the second reset rate applies to the third year payments.)