An ARM is made for $165,000 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.

Present value (PV) is defined as the current or present value of all future sums of cash flow or money at a specified rate of return. This rate of return is known as the discounted rate, which is essentially the interest rate, discounted over some time. …