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Suppose that you have decided to purchase a house for $400,000 using an adjustable-rate mortgage with the terms provided below.
Loan-to-value ratio: 90%
Index rate: one-year Treasury yield (currently 3.00%)
Margin: 250 basis points
Amortization: 15 years with monthly payments and compounding
Annual cap: 1.5 percentage points
Lifetime cap: 5 percentage points
Adjustment period: Annually
Teaser Rate 2.50%
If the yield on one-year Treasuries increases by 2.62% during the first year, what will your payment be during the second year of the loan?
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