An ARM is made for $180,000 for 30 years with the following terms: Initial interest rate =

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Question:

An ARM is made for $180,000 for 30 years with the following terms:

Initial interest rate = 7 percent
Index = 1−year Treasuries
Payments reset each year
Margin = 2 percent
Interest rate cap = None
Payment cap = 5 percent increase in any year
Discount points = 2 percent

Fully amortizing; however, negative amortization allowed if payment cap reached

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 = 8.5 percent; (BOY) 4 = 9.5 percent; (BOY) 5 = 11 percent.

Required:

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

b. Compute the yield for the ARM for the five-year period.