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Consider a $225,0005-1 ARM amortized over 30 years with monthly payments. The loan...

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Finance

Consider a $225,0005-1 ARM amortized over 30 years with monthly payments. The
loan is indexed to the 1-year constant maturity Treasury security with a 3 percent
margin and 2-6 caps (2 percent annually and 6 percent lifetime. The initial interest
rate on this loan is 4.5 percent.
a) What is the initial monthly payment on this loan?
b) How much will the borrower still owe on this loan at the first adjustment date (the
end of the 5th year)?
c) Suppose that the yield on the 1-year T-Bill is 3.5 percent at the first adjustment
date. What will the next payment be on the loan after it adjusts?
d) If the yield on the 1-year T-Bill is 2.75% at the next adjustment date, what will be
the new payment on the loan at that time?
e) Suppose that the borrower must pay two points in conjunction with this loan and
expects to hold it for seven years. What is the loans effective borrowing cost
(EBC)?

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