Consider a $ ARM amortized over years with monthly payments. The
loan is indexed to the year constant maturity Treasury security with a percent
margin and caps percent annually and percent lifetime. The initial interest
rate on this loan is 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 th year
c Suppose that the yield on the year TBill is percent at the first adjustment
date. What will the next payment be on the loan after it adjusts?
d If the yield on the year TBill is 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
