An ARM is made for $165,000 for 30 years with the following terms Initial interest rate= 7 percent Index = 1-year Treasuries Payments reset each year Margin= 2 percent Interest rate cap = None Payment cap = 5 percent increase in any year Discount points=2 percent Fully amortizing; however, negative amortization allowed if payment cap reached Based on estimated forward rates, the index to which the ARM is tied is forecasted as follows: Beginning of year (BOY) 2 = 7 percent; (BOY) 3=8.5 percent, (BOY) 4 = 9.5 percent; (BOY) 5 = 11 percent Required: a. Compute the payments and loan balances for the ARM for the five-year period. b. Compute the yield for the ARM for the five-year period.
An ARM is made for $165,000 for 30 years with the following terms Initial interest rate= 7 percent Index = 1-year Treasuries Payments reset each year Margin= 2 percent Interest rate cap = None Payment cap = 5 percent increase in any year Discount points=2 percent Fully amortizing; however, negative amortization allowed if payment cap reached Based on estimated forward rates, the index to which the ARM is tied is forecasted as follows: Beginning of year (BOY) 2 = 7 percent; (BOY) 3=8.5 percent, (BOY) 4 = 9.5 percent; (BOY) 5 = 11 percent Required: a. Compute the payments and loan balances for the ARM for the five-year period. b. Compute the yield for the ARM for the five-year period.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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Transcribed Image Text:An ARM is made for $165,000 for 30 years with the following terms:
Initial interest rate = 7 percent
Index 1-year Treasuries
Payments reset each year
Margin = 2 percent
Interest rate cap = None
Payment cap = 5 percent increase in any year
Discount points=2 percent
Fully amortizing; however, negative amortization allowed if payment cap reached
Based on estimated forward rates, the index to which the ARM is tied is forecasted as follows: Beginning of year (BOY) 2 = 7 percent;
(BOY) 3=8.5 percent; (BOY) 4 = 9.5 percent; (BOY) 5 = 11 percent
Required:
a. Compute the payments and loan balances for the ARM for the five-year period.
b. Compute the yield for the ARM for the five-year period
Transcribed Image Text:Required A Required B
Compute the payments and loan balances for
Round "Payments" to 2 decimal places and "Lo
Year 1
Year 2
Year 3
Year 4
Year 5
Payments
Loan Balance
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