Question: Consider a 1-year ARM, which has 30-year maturity, fully amortizing, $75,000 mortgage, indexed to the 1-year constant maturity Treasury with a 3% margin, and 2%

Consider a 1-year ARM, which has 30-year maturity, fully amortizing, $75,000 mortgage, indexed to the 1-year constant maturity Treasury with a 3% margin, and 2% annual interest rate cap. The initial contract rate is 6%.

a) What is the initial payment on this mortgage?

b) What is the balance due at the end of the first year?

c) Suppose the 1-year T-Bill is at 6% at the index date. What is the new contract interest rate on this mortgage for the second year?

d) What is the required monthly payment during the second year?

e) What the contract interest rate in the third year if the T-Bill rate stays at 6% at the next adjustment date?

f) What is the required monthly payment during the third year?

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