A borrower has been analyzing different adjustable rate mortgage (ARM) alternatives for the purchase of his new home. The borrower anticipates owning the home for five years. The lender first offers a $150,000, 30-year ARM with the following terms: Initial interest rate = 6 percent Index 1-year Treasuries Payments adjusted each year Margin 2 percent Interest rate cap = None Payment cap None Negative amortization = Not allowed Discount points 2 percent Based on estimated forward rates, the index to which the ARM is tied is forecasted as follows: Beginning of year BOY 27 percent; BOY 38.5 percent; BOY 4-9.5 percent, BOY S 11 percent Compute the payments, loan balances, and yield for the unrestricted ARM for the five-year period.

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