A basic ARM is made for $200,000 at an initial interest rate of 6 p~rc~nt for 30 years with ~n annual reset dale. The borrower believes that the interest rate at beglllnmg or year (BO)~ 2 wil l increase to 7 percent.

o. Assuming tbat a flil ly amortizing loan is made, what will monthly payments be during year

!?

b. B~sed on

(a) what wi ll the loan balance be at the end of year (EOn I?

c. Given that the interest rate is expected to be 7 percent at the beginning or year two, what will monthly payments be during year 2?

d. What will be the loan balance at the EOY 2?

e. What would be the monthly payments in year I if they are to be interest only?

f Assuming terms in (e), what would monthly interest~only payments be i.n year 2?

AppendixLO1