Refer to problem 2 As a second ARM alternative, assume the borrower can borrow S150,000 for 30 years with the following terms: Initial interest rate - 7 percent Index 1-year Treasuries Payments adjusted each year Margin = 2 percent Interest rate cap None Payment cap 5 percent increase in any year Negative amortization = Yes 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 3 = 8.51 percent. 5 percent, BOY 49.5 percent, BOYS = 1! Compute the payments, loan balances, and yield for the ARM for the five-year period.

AppendixLO1