Compute the payments-yield for the arm for five-year period

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Reference no: EM132025741

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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 = 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;

(EOY) 5 =11 percent.

Compute the payments, loan balances, and yield for the ARM for the five-year period.

Reference no: EM132025741

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