QUESTION 4 Assume the initial rate on a 1/1 ARM is 3.50%. The loan has a margin of +275 basis points above Libor. In one year after the loan is originated, the Libor is 2.00%. What is the fully indexed rate on the loan in one year? QUESTION 5 A bank makes a 30 year Fully Amortizing FRM for $1,600,000 at an annual interest rate of 5% compounded monthly, with monthly payments. Suppose inflation is 2% per year, compounded monthly. What is the real value of the 120th payment? QUESTION 6 Tom got a 30 year fully amortizing FRM for $1,500,000 at 6%, with constant monthly payments. After 3 years of payments, rates fall and he can get a 27 year FRM at 5%, but he must pay 2 points and $1000 in closing costs to get the new loan. Think of the refinancing decision as an investment for Tom, he pays a fee now but saves money in the future in the form of lower payments. What is the annualized IRR of refinancing for Tom assuming he prepays the new loan 5 years after refinancing? (Clarification: Tom will prepay the new loan 3+5=8 years after the house is purchased)