Question: Suppose that you are thinking about taking out an adjustable rate loan (ARM) with the following information: Teaser Rate: 3.5% Margin: 4.0% Year 1 TSY

Suppose that you are thinking about taking out an adjustable rate loan (ARM) with the following information:

Teaser Rate: 3.5%

Margin: 4.0%

Year 1 TSY Strip Index: 2.0%

Year 2 TSY Strip Index: 3.5%

Year 3 TSY Strip Index: 1.5%

Periodic Cap: 1.0%

Lifetime Cap: 5.0%

Caps are NOT based off of the Teaser

A)What is the interest rate in the 1st year of the loan?

  1. 3.5%
  2. 5.5%
  3. 6.0%
  4. 7.5%
  5. None of the above

  6. B)What is the interest rate in the 2nd year of the loan?

  7. 3.5%
  8. 4.0%
  9. 6.0%
  10. 7.0%
  11. None of the above

  12. C)What is the maximum possible interest rate you will pay throughout the life of the loan?

  13. 8.5%
  14. 9.0%
  15. 11.0%
  16. 12.5%
  17. None of the above

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