Consider a ARM that will adjust annually, based on the one-year constant maturity U. S. Treasury Bill rate. Further, assume that this mortgage has a starting interest rate of two percent (2%) for the first year. Additionally, the margin on this mortgage is 250 basis points. Finally, this loan has a 1.50% annual interest rate cap, and a 5.00% lifetime interest cap. At the time that the mortgage is offered, the one-year constant maturity T-Bill rate is 1.50%. a. If the T-Bill rate falls to 1.25% at the first change/reset date, what is the interest rate on this ARM for the second year? Show your work and give a brief explanation regarding your answer. b. If the T-Bill rate remains constant at 1.25% at the second change/reset date, what is the interest rate on the ARM for the third year?

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To calculate the interest rate on the ARM for the second year we need to ... View the full answer