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An ARM is made for $50,000 for 30 years with the following terms:
Initial interest rate = 1 percent
Index = 1-year Treasuries
Payments reset each year
Margin = 200 basis points
Interest rate cap = none
Payment cap = none
Discount points = 1 point
Negative amortization is not allowed
Based on estimated forward rates, the 1-year Treasury yields to which the ARM is tied is forecasted
as follows:
Beginning of year (BOY) 2 = one percent (1%); (BOY) 3 = two percent (2%); (BOY) 4 = 3.5%;
(BOY) 5 = 5%
Compute the interest rate, monthly payments, and loan balances for each year for this unrestricted
ARM, and the yield for the entire five-year period.
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