In this problem, you are being asked to calculate the effective borrowing cost (rate) of an adjustable rate mortgage assuming you live in the house till the loan matures under the following two (2) scenarios:

1. Interestrates(index)rise1/2%everyyear 2. Interestrates(index)rise2%everyyear

I suggest you put each scenario on a separate sheet.

A description of the 1-year ARM with monthly payments is as follows: Amount: $300,000

Maturity: 10 years

Initial Contract Rate (teaser rate): 3.00% Margin: 125bp (1basis point = 0.01%)

Current Index Yield: 2%

Caps and Floors: Annually: 1.5%, Lifetime: 5%

Create a table showing opening balance, interest payment, principal payment, debt service, ending balance, and inflation rate for each year.

Calculate effective cost of this loan.

Create a graph, showing the time-series dynamics of Balance

Create graph(s), showing the time-series dynamics of Interest payment and Principal payment together