Question: Consider a $2 million, 30-year amortization ARM with monthly payments and annual interest adjustments. The initial interest rate is 6%. The index for the loan is one-year U.S. government bonds, currently yielding 5.5%. The loan has a margin of 250 basis points.
a. Is the loan's initial interest rate a teaser rate? How do you know?
b. If one-year T-bonds remain at 5.5%, what will be the applicable interest rate for this mortgage after the first year?
c. What are the initial monthly payments on this loan?
d. Assuming T-bonds remain at 5.5%, what will be the monthly payments after the first year?
e. Under that assumption (and assuming no discount points), what is the forecasted yield-tomaturity on this loan at the time it is issued, assuming it has no discount points?