2. Using tab 2 in the template, create the amortization spreadsheet and answer the following questions for a $700,000 10-year adjustable-rate mortgage (ARM) loan that is fully-amortizing and has monthly payments. A teaser rate of 4.4% applies to the mortgage payments and amortization during the first 2 years of the loan. After the second , the annual interest rate on the loan is equal to the going rate on an index + a margin of 2.7%, subject to an annual interest rate cap of 2.5% and a lifetime interest rate cap of 5.8% over the initial teaser rate. Expectations for the beginning-of-year values for the appropriate index are as follows: year, Year Index 3451 3.1% 4.7% 6.5% 6 2.5% 7 2.9% 8 5.1% 9 6.6% 10 6.0% a) Based on these expectations and conditions, what would be the actual (contract) interest rates applied to the mortgage payment during years 1 through 10? b) What would be the APR on this loan, if held until maturity – assuming up-front points of 2.0%? c) What is the outstanding balance at the end of year 6?
2. Using tab 2 in the template, create the amortization spreadsheet and answer the following questions for a $700,000 10-year adjustable-rate mortgage (ARM) loan that is fully-amortizing and has monthly payments. A teaser rate of 4.4% applies to the mortgage payments and amortization during the first 2 years of the loan. After the second , the annual interest rate on the loan is equal to the going rate on an index + a margin of 2.7%, subject to an annual interest rate cap of 2.5% and a lifetime interest rate cap of 5.8% over the initial teaser rate. Expectations for the beginning-of-year values for the appropriate index are as follows: year, Year Index 3451 3.1% 4.7% 6.5% 6 2.5% 7 2.9% 8 5.1% 9 6.6% 10 6.0% a) Based on these expectations and conditions, what would be the actual (contract) interest rates applied to the mortgage payment during years 1 through 10? b) What would be the APR on this loan, if held until maturity – assuming up-front points of 2.0%? c) What is the outstanding balance at the end of year 6?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
Transcribed Image Text:2. Using tab 2 in the template, create the amortization spreadsheet and answer the
following questions for a $700,000 10-year adjustable-rate mortgage (ARM) loan that is
fully-amortizing and has monthly payments. A teaser rate of 4.4% applies to the
mortgage payments and amortization during the first 2 years of the loan. After the second
, the annual interest rate on the loan is equal to the going rate on an index + a margin
of 2.7%, subject to an annual interest rate cap of 2.5% and a lifetime interest rate cap of
5.8% over the initial teaser rate. Expectations for the beginning-of-year values for the
appropriate index are as follows:
year,
Year
Index
3451
3.1%
4.7%
6.5%
6
2.5%
7
2.9%
8
5.1%
9
6.6%
10
6.0%
a) Based on these expectations and conditions, what would be the actual (contract)
interest rates applied to the mortgage payment during years 1 through 10?
b) What would be the APR on this loan, if held until maturity – assuming up-front points
of 2.0%?
c) What is the outstanding balance at the end of year 6?
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 2 steps
Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education