An option ARM is made for $200,000 for 30 years. The start rat: is 5 percellt and the borr,:)wer has the option to (1) make monthly interest-only payments or (2) Increase payments to p~y. Ilown loan principal at any time. However, after the lOth year the loan payments must be SUfflC1CflL 10 fully amortize the loan at maturity.

a. If the borrower makes interest-only payments for the first year, whm will payments be:

b. If at the beginning of year (BOY) 2 the reset rate remains at 5 percent and the borrower decides to increase monthly payments by S50 for the en tire ycar, what will payments be? What will the loan balance be at the end of year (EOY) 2?

c. What jf at the beginning of year 3, the reset rate is 6 perccnt and the borrower decides to make payments for the remaining 28 years so as to fu lly amortize the loan. What will payments be?

AppendixLO1