Assume that a lender offers a 30-year, $150,000 adjustable-rate mortgage (ARM) with the following terms:Initial interest rate 7.5 percentIndex 1-year TreasuriesPayments reset each yearMargin 2 percentInterest rate cap 1 percent annually; 3 percent lifetimeDiscount points 2 percentFully amortizing; however, negative amortization allowed if interest rate caps reachedBased 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;(EOY) 5 11 percent.Compute the payments, loan balances, and yield for the ARM for the five-year period.
Assume that a lender offers a 30-year, $150,000 adjustable-rate mortgage (ARM) with the following terms:Initial interest rate 7.5 percentIndex 1-year TreasuriesPayments reset each yearMargin 2 percentInterest rate cap 1 percent annually; 3 percent lifetimeDiscount points 2 percentFully amortizing; however, negative amortization allowed if interest rate caps reachedBased 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;(EOY) 5 11 percent.Compute the payments, loan balances, and yield for the ARM for the five-year period.
Chapter19: Lease And Intermediate-term Financing
Section: Chapter Questions
Problem 17P
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Assume that a lender offers a 30-year, $150,000 adjustable-rate mortgage (ARM) with the following terms:
Initial interest rate 7.5 percent
Index 1-year Treasuries
Payments reset each year
Margin 2 percent
Interest rate cap 1 percent annually; 3 percent lifetime
Discount points 2 percent
Fully amortizing; however, negative amortization allowed if interest rate caps reached
Based on estimated forward rates, the index to which the ARM is tied is
Beginning of year (BOY) 2 7 percent; (BOY) 3 8.5 percent; (BOY) 4 9.5 percent;
(EOY) 5 11 percent.
Compute the payments, loan balances, and yield for the ARM for the five-year period.
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