Problem 5-8 Assume that a lender offers a 30-year, $148,000 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 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.
Problem 5-8 Assume that a lender offers a 30-year, $148,000 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 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.
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
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Transcribed Image Text:Problem 5-8
Assume that a lender offers a 30-year, $148,000 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
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.
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