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A borrower has been analyzing different adjustable rate mortgage (ARM) alternatives for the purchase of a property. The borrower anticipates owning the property for five years. The lender first offers a $150,000, 30-year fully amortizing ARM with the following terms:

Initial interest rate = 6 percent
Index = 1-year treasuries
Payment reset each year
Margin = 2 percent
Interest rate cap = None
Payment cap = None
Negative amortizing = Not allowed
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. Compute the payments, loan balances, and yield for the unrestricted ARM for the five-year period.

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92081871

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