1)A price level adjusted mortgage (PLAM) is made with the following terms:

Amount$95,000

Initial interest rate4 percent

Term30 years

Payments to be reset at the beginning of each year.

Assuming inflation is expected to increase at the rate of 6 percent per year at the EOY2

a.Compute the payments at the BOY1 and BOY2?

b. What is the loan balance at the end of the 2^ndyear?

c. Compute the payments at the BOY3?

2) A 5/1 ARM is made for $250,000 at 7percent with a 30-year maturity.

a. Assuming that the loan is fully amortizing, what will be the monthly payments? What will be the loan balance after five years?

b. What would new payments be beginning in year 6 If the interest rate fell to 6 percent and the loan continued to be fully amortizing?

c. In (a) what would monthly payments be during year 1 if they were interest only? What would

payments be beginning in year 6 if interest rates fell to 6 percent and the loan became fully

amortizing?

3)An ARM is made for $150,000 for 30 years with the following terms:

Initial interest rate7 percent

Payments reset each year

Interest rate capNone

Payment cap6 percent increase in any year

Fully amortizing; however, negative amortization allowed if payment cap reached

Beginning of year (BOY) 2 =7 percent; (BOY) 3=9.5 percent.

Compute the payments, and loan balance.