You borrow $140,000 to buy a house. It is a 30 year loan with monthly compounding, and an initial annual interest rate of 7.00%.

This is an ARM loan with several important characteristics:

1. The interest rate in year two will increase to 10.00% annually.

2. There is a monthly payment cap each year of 8.00%.

3. Negative amortization is possible in this loan.

a) What will be your monthly payment on the loan for the first year?

b) How much will you owe (i.e., PV) on the loan at the End of Year 1 (or the Beginning of Year 2)?

c) If monthly payments are capped, and given that this loan can be negative amortizing, then how much will you owe at the End of Year 2?