Question

2. An ARM is made for $50,000 for 30 years with the following terms Initial interest rate 1 percent Paymen Interest rate cap -none Discount points point Negative amortization is not allowed Index 1-year Treasuries Margin 200 basis points ts reset each year Payment cap-none Based on estimated forward rates, the 1-year Treasury yields to which the ARM is tied is forecasted as follows: Beginning of year (BOY) 2-one percent (1%); (BOY) 3-two percent (2%); (BOY) 4-35%; (BOY) 5-5% Compute the interest rate, monthly payments, and loan balances for each year for this unrestricted ARM, and the yield for the entire five-year period.

Answer 1

		YEAR 1
		Initial interest rate in BOY 1	1%
	Rate	Monthly interest in year 1=(1/12)%	0.00083333
	Nper	Number of Months	360	(30*12)
	Pv	Principal at beginning of year 1	$50,000
		Monthly payment in year 1	$160.82	(Using PMT function of excel with Rate=0.000833, Nper =360, Pv=-50000)
		Number of months of payment at this rate	12
	FV1	Future value of payments at end of year1	$1,938.71	(Using FV function of excel with Rate=0.000833, Nper =12, Pmt=-160.82)
	FV2	Future value of Principal	$50,502.30	(Using FV function of excel with Rate=0.000833, Nper =12, Pv=-50000)
	FV2-Fv1	Loan Balance at Beginning of Year2	$48,563.59
		YEAR2
		Interest rate in BOY 2	1%
		Monthly Interest in year 2=(1+2)/12)%	0.250%	0.25
	Rate	Monthly interest in year 2=(3/12)%	0.0025
	Nper	Number of Months	348	(29*12)
	Pv	Principal at beginning of year 2	$48,564
		Monthly payment in year 2	$209.11	(Using PMT function of excel with Rate=0.0025, Nper =348, Pv=-48564)
		Number of months of payment at this rate	12
	FV1	Future value of payments at end of year2	$2,544.14	(Using FV function of excel with Rate=0.0025, Nper =12, Pmt=-209.11)
	FV2	Future value of Principal	$50,040.70	(Using FV function of excel with Rate=0.0025, Nper =12, Pv=-48564)
	FV2-Fv1	Loan Balance at Beginning of Year3	$47,497
		YEAR3
		Interest rate in BOY 3	2%
		Monthly Interest in year 3=(2+2)/12)%	0.333%
	Rate	Monthly interest in year 3=(4/12)%	0.003333		0.003333
	Nper	Number of Months	336	(28*12)
	Pv	Principal at beginning of year 3	$47,497
		Monthly payment in year 3	$235.20	(Using PMT function of excel with Rate=0.00333, Nper =336, Pv=-47497)
		Number of months of payment at this rate	12
	FV1	Future value of payments at end of year3	$2,874.69	(Using FV function of excel with Rate=0.00333, Nper =12, Pmt=-235.20)
	FV2	Future value of Principal	$49,431.45	(Using FV function of excel with Rate=0.00333, Nper =12, Pv=-47497)
	FV2-Fv1	Loan Balance at Beginning of Year4	$46,557
		YEAR4
		Interest rate in BOY 4	3.5%
		Monthly Interest in year 4=(3.5+2)/12)%	0.4583%		0.458333
	Rate	Monthly interest in year 4=(5.5/12)%	0.00458333		0.004583
	Nper	Number of Months	324	(27*12)
	Pv	Principal at beginning of year 4	$46,557
		Monthly payment in year 4	$276.15	(Using PMT function of excel with Rate=0.0045833, Nper =324, Pv=-46557)
		Number of months of payment at this rate	12
	FV1	Future value of payments at end of year4	$3,398.57	(Using FV function of excel with Rate=0.0045833, Nper =12, Pmt=-276.15)
	FV2	Future value of Principal	$49,182.92	(Using FV function of excel with Rate=0.0045833, Nper =12, Pv=-46557)
	FV2-Fv1	Loan Balance at Beginning of Year5	$45,784
		YEAR 5
		Interest rate in BOY 5	5.0%
		Monthly Interest in year 5=(5+2)/12)%	0.5833%		0.583333
	Rate	Monthly interest in year 5=(5.5/12)%	0.00583333		0.005833
	Nper	Number of Months	312	(26*12)
	Pv	Principal at beginning of year 5	$45,784
		Monthly payment in year 5	$319.04	(Using PMT function of excel with Rate=0.0058333, Nper =312, Pv=-45784)
		Number of months of payment at this rate	12
	FV1	Future value of payments at end of year5	$3,953.76	(Using FV function of excel with Rate=0.0058333, Nper =12, Pmt=-319.04)
	FV2	Future value of Principal	$49,094.11	(Using FV function of excel with Rate=0.0058333, Nper =12, Pv=-45784)
	FV2-Fv1	Loan Balance at Beginning of Year6	$45,140.35
		Loan Amount	$50,000
		Discount=0.01*50000=	$500.00	Please see attached images
		Net Cash Flow	$49,500	(Yield Calculated on Cash flows=4.15%				MONTHWISE CASH FLOW Cash Flow 0 ($49,500) 1$160.82 2$160.82 3 $160.82 4$160.82 5 $160.82 6 $160.82 7 $160.82 8 $160.82 9 $160.82 10 $160.82 11$160.82 12 $160.82 13$209.11 14 $209.11 15 $209.11 16 $209.11 17 $209.11 18 $209.11 19 $209.11 20$209.11 21 $209.11 22 $209.11 Month 23 $209.11 24 $209.11 25 $235.20 26$235.20 27 $235.20 28 $235.20 29 $235.20 30 $235.20 31 $235.20 32 $235.20 33 $235.20 34 $235.20 35 $235.20 36$235.20 37 $276.15 38 $276.15 39 $276.15 40$276.15 41$276.15 42$276.15 43$276.15 44$276.15 45$276.15 46 $276.15 43 276.15 44$276.15 45$276.15 46$276.15 47$276.15 48 $276.15 49$319.04 50 $319.04 51$319.04 52 $319.04 53 $319.04 54 $319.04 55 $319.04 56$319.04 57 $319.04 58 $319.04 59$319.04 60 $45,459.39 (319.04+45140.35) 0.346% 4.1 5% (Using IRR Function of excelover cash flows MONTHLY YIELD FOR 5 YEAR PERIOD ANNUAL YIELD-0.346*12-