Assume that a lender offers a 30-year, $153,000 adjustable rate mortgage (ARM) with the following terms:Initial interest rate = 7.5 percentIndex = one-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; (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.Complete this question by entering your answers in the tabs below.Required A Required BCompute the payments and loan balances for the ARM for the five-year period. (Do not round intermediate calculations.Round "Payments" to 2 decimal places and "Loan Balance" to the nearest dollar amount.)Payments Loan BalanceYear 1Year 2Year 3Year 4Year 5

Adjustable Rate Mortgage(ARM):It is a home loan with a variable interest rate that changes over…

Answered: (BOY) 38.5 percent; (BOY) 4 = 9.5…

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(BOY) 38.5 percent; (BOY) 4 = 9.5 percent; (BOY) 5 = 11 percent.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter19: Lease And Intermediate-term Financing

Section: Chapter Questions

Problem 12P

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Question

Assume that a lender offers a 30-year, $153,000 adjustable rate mortgage (ARM) with the following terms:
Initial interest rate = 7.5 percent
Index = one-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 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.
Complete this question by entering your answers in the tabs below.
Required A Required B
Compute the payments and loan balances for the ARM for the five-year period. (Do not round intermediate calculations.
Round "Payments" to 2 decimal places and "Loan Balance" to the nearest dollar amount.)
Payments Loan Balance
Year 1
Year 2
Year 3
Year 4
Year 5

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