Question two Consider a loan of USD 60,000 with a term of 25 years payable monthly....

 

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Question two Consider a loan of USD 60,000 with a term of 25 years payable monthly. The initial interest rate is 8%. We assume that the ARM interest rate will be adjusted annually. Hence the first adjustment will occur at the beginning of the second year. At that time the composite rate will be determined by the index of one year US Treasury security, plus 2% margin. Assume (1) that the index of one year US treasury securities takes on a pattern of 10, 12, and 14% for the next three years based on the forward rates in existence at the time each ARM is originated, and (2) that monthly payment interest rate adjustments are made annually. Assume that the maximum rate with which payment may increase annually is 8%.. Required a) Compute the PMT for the first four years. b) Compute the loan balances at the end of each of the first four years ((15) marks) Question two Consider a loan of USD 60,000 with a term of 25 years payable monthly. The initial interest rate is 8%. We assume that the ARM interest rate will be adjusted annually. Hence the first adjustment will occur at the beginning of the second year. At that time the composite rate will be determined by the index of one year US Treasury security, plus 2% margin. Assume (1) that the index of one year US treasury securities takes on a pattern of 10, 12, and 14% for the next three years based on the forward rates in existence at the time each ARM is originated, and (2) that monthly payment interest rate adjustments are made annually. Assume that the maximum rate with which payment may increase annually is 8%.. Required a) Compute the PMT for the first four years. b) Compute the loan balances at the end of each of the first four years ((15) marks) Question two Consider a loan of USD 60,000 with a term of 25 years payable monthly. The initial interest rate is 8%. We assume that the ARM interest rate will be adjusted annually. Hence the first adjustment will occur at the beginning of the second year. At that time the composite rate will be determined by the index of one year US Treasury security, plus 2% margin. Assume (1) that the index of one year US treasury securities takes on a pattern of 10, 12, and 14% for the next three years based on the forward rates in existence at the time each ARM is originated, and (2) that monthly payment interest rate adjustments are made annually. Assume that the maximum rate with which payment may increase annually is 8%.. Required a) Compute the PMT for the first four years. b) Compute the loan balances at the end of each of the first four years ((15) marks) Question two Consider a loan of USD 60,000 with a term of 25 years payable monthly. The initial interest rate is 8%. We assume that the ARM interest rate will be adjusted annually. Hence the first adjustment will occur at the beginning of the second year. At that time the composite rate will be determined by the index of one year US Treasury security, plus 2% margin. Assume (1) that the index of one year US treasury securities takes on a pattern of 10, 12, and 14% for the next three years based on the forward rates in existence at the time each ARM is originated, and (2) that monthly payment interest rate adjustments are made annually. Assume that the maximum rate with which payment may increase annually is 8%.. Required a) Compute the PMT for the first four years. b) Compute the loan balances at the end of each of the first four years ((15) marks)

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Loan Parameters Loan amountUSD 60000 Term25 years 300 months Payment frequencyMonthly Initial intere... View the full answer