Assignment
1. Suppose you consideringan ARM with the following characteristics (50 points):
Mortgage amount $2,000,000
Index 1-year Treasury Bill yield Margin 2.50
Maximum annual adjustment 2%
Lifetime interest cap 6%
Discount points 2.00
Loan maturity 30 years
a. If the Treasury Bill yield is currently 6 percent, what is the monthly payment for the first year?
b. If the index moves to 7.5 percent at the end of the first year, what is the monthly payment for year 2.
c. If the loan is paid off at the end of year 2, what is the effective cost (yield)?
2. Consider a PLAM with the following features:
Mortgage amount $190,000
Mortgage term 30 years
Current real rate 5%
Inflation for the next 3 years respectively 2%, 3%, 5%
Mortgage payments adjusted annually
a. What are the monthly payments for each of the first 3 years?
b. What is the effective cost if the loan is repaid at the end of year 3?
c. What is the effective cost if the loan is repaid at the end of year3 and the lender charges 2 discount points up front?
Format your assignment according to the following formatting requirements:
1. The answer should be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides.
2. The response also includes a cover page containing the title of the assignment, the student's name, the course title, and the date. The cover page is not included in the required page length.
3. Also include a reference page. The Citations and references should follow APA format. The reference page is not included in the required page length.