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 = 1-year treasuries
Payment reset each year
Margin= 2 percent
Interest rate cap = 1 percent annually; 3 percent lifetime
Discount points = 2 percent
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.