Problem $5-6$

A borrower has been analyzing different adjustable rate mortgage $($ARM$)$ alternatives for the purchase of a property. The borrower anticipates owning the property for five years. The lender first offers a $$157,000,30-$year fully amortizing ARM with the following terms:

Initial interest rate $=6$ percent

Index $=1-$year Treasuries

Payments reset each year

Margin $=2$ percent

Interest rate cap $=$ None

Payment cap $=$ None

Negative amortization $=$ Not allowed

Discount points $=2$ percent

Based on estimated forward rates, the index to which the ARM is tied is forecasted as follows: Beginning of year $($BOY$)2=7$ percent; $($BOY$)3=8\mathrm{.}5$ percent; $($BOY$)4=9\mathrm{.}5$ percent; $($BOY$)5=11$ percent.

Required:

Compute the payments and loan balances for the unrestricted ARM for the five$-$year period.

Compute the yield for the unrestricted ARM for the five$-$year period.