An ARM is made for $225,000 for 30 years with the following terms: Initial interest rate = 7 percent Index = 1year Treasuries Payments 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. Required: a. Compute the payments and loan balances for the ARM for the five-year period. b. Compute the yield for the ARM for the five-year period..

1. An ARM is made for $225,000 for 30 years with the following terms:
Initial interest rate = 7 percent
Index = 1year Treasuries
Payments 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.
Required:
a. Compute the payments and loan balances for the ARM for the five-year period.
b. Compute the yield for the ARM for the five-year period.