SHOW CLEAR WORK ON EXCEL
Assume that a lender offers a 30-year, $150,000 adjustable rate mortgage (ARM) with the following terms:
Initial interest rate = 7.5 percent
Index = one-year Treasuries
Payments reset each year
Margin = 2 percent
Interest rate cap = 1 percent annually; 3 percent lifetime
Discount points = 2 percent
Fully amortizing; however, negative amortization allowed if interest rate caps 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;
(EOY) 5 =11 percent.
Compute the payments, loan balances, and yield for the ARM for the five-year period.