Question

A $75,000 ARMis offered at 7.75% with monthly payments for 30 years. Future interest rates are expected to be: EOY1, 9.5%; EOY2, 10.25%. One discount point was paid at origination. Calculate the forecast payment for the first 3 years. (Answers given, please show calc work)

a. Calculate the forecast payment for the first 3 years. [$537.31, $628.98, $669.07]

b. Calculate the effective interest rate for a 3 year holding period. [9.47%]

Answer 1

Formulas used:-

Value of Loan	75000
time(in months)	360
Rate(monthly)	=7.75%/12
Installment In year-1	=PMT(E5,E4,-$E$3)
time(in months)	348
Rate(monthly)	=9.5%/12
Installment In year-2	=PMT(E8,E7,-$E$3)
time(in months)	336
Rate(monthly)	=10.25%/12
Installment In year-2	=PMT(E11,E10,-$E$3)
Effective Interest rate	=(1.0775*1.095*1.1025)^(1/3)-1

I hope my efforts will be fruitful to you.....