Problem #2 --

What is the yield on the following 1-year adjustable rate mortgage?

What is the lenders expected yield (assume a holding period of term) for the following

loan if 1-Year Treasury yields are expected to be 5% today, 8% 12 months from now, and

4% thereafter?

ARM description -

Rate resets every year.

Fully adjusted rate = Index + 2%.

Index = 1-Year Treasury yield at reset date.

Lifetime Cap of 9%.

Period change cap of 2 percentage pints (200 bps)

No other caps, floors, or max adjustments.

Teaser rate of 5%

30-year loan with no points or fees.

Loan amount $400,000