An ARM is made for $150,000 for 30 years with the following terms:
Initial interest rate= 7 percent
Index = 1-year treasuries
Payment reset each year
Margin= 2 percent
Interest rate cap= None
Payment cap = 5 percent increase in any year
Discount points = 2 percent
Fully amortizing; however, negative amortization allowed if payment cap reached
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 ARM for the five-year period.