Question: Consider a 3/1 ARM with initial cap equal to 5%, periodic cap equal to 1%, and lifetime cap equal to 6%. Suppose the teaser rate

Consider a 3/1 ARM with initial cap equal to 5%, periodic cap equal to 1%, and lifetime cap equal to 6%. Suppose the teaser rate for this loan is 2.25% and the loan is indexed to LIBOR rate with a margin of 2.5%. Which statement is FALSE about future interest rates for this loan?

At the first reset, the rate can not go above 7.25%

The maximum interest rate on this loan is 6%

The interest rate in the second year will be 2.25%

If at the first rest the LIBOR rate is 3%, then the fully indexed rate will be 5.5%

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