Consider an adjustable rate mortgage (ARM) of $190,000 with a maturity of 30 years and monthly payments. At the end of each year, the interest rate is adjusted to become 2.5 percentage points above the index. There is an annual cap of 250 basis points, and a lifetime cap of 500 basis points (i.e., with 2.5/5 interest rate caps). The lender offers a teaser of 1.00 % for the first year. The following are the current and index rates: Time At origination (for yr 1) At end of yr 1 (for yr 2) At end of yr 2 (for yr 3) At end of yr 3 (for yr 4) O 9.55% O 11.25 % 10.25% 13.15 % 8.75% T-Bill Yield (given) At end of yr 4 (for yr 5) #6). Assume that the mortgage has a 5 percent prepayment penalty for the loan balance when prepaid. What is the effective annual cost of the mortgage if is prepaid at the end of year 2? 14.85 % 4.50% 7.00% 9.00% 5.00% 8.00%

Consider an adjustable rate mortgage (ARM) of $190,000 with a maturity of 30 years and monthly payments. At the end of each year, the interest rate is adjusted to become 2.5 percentage points above the index. There is an annual cap of 250 basis points, and a lifetime cap of 500 basis points (i.e., with 2.5/5 interest rate caps). The lender offers a teaser of 1.00 % for the first year. The following are the current and index rates: Time At origination (for yr 1) At end of yr 1 (for yr 2) At end of yr 2 (for yr 3) At end of yr 3 (for yr 4) O 9.55% O 11.25 % 10.25% 13.15 % 8.75% T-Bill Yield (given) At end of yr 4 (for yr 5) #6). Assume that the mortgage has a 5 percent prepayment penalty for the loan balance when prepaid. What is the effective annual cost of the mortgage if is prepaid at the end of year 2? 14.85 % 4.50% 7.00% 9.00% 5.00% 8.00%

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter19: Lease And Intermediate-term Financing

Section: Chapter Questions

Problem 14P

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