Question

An ARM is made for $50,000 for 30 years with the following terms: Initial interest rate = 1 percent Index = 1-year Treasuries Payments reset each year Margin = 200 basis points Interest rate cap = none Payment cap = none Discount points = 1 point Negative amortization is not allowed Based on estimated forward rates, the 1-year Treasury yields to which the ARM is tied is forecasted as follows: Beginning of year (BOY) 2 = one percent (1%); (BOY) 3 = two percent (2%); (BOY) 4 = 3.5%; (BOY) 5 = 5% Compute the interest rate, monthly payments, and loan balances for each year for this unrestricted ARM, and the yield for the entire five-year period.

Answer 1