Business, 16.11.2020 17:50 Itssata

Lary is considering an ARM loan offered by a local lender. The loan amount is $300,000. The term of the loan is 10 years. The index today is 2%. The margin on the loan is 2%. The teaser (first year only) is 1%. The composite rate adjusts annually and is subject to annual and lifetime caps of 2% and 5%. The loan does not provide for negative amortization nor does it provide floors. The loan requires 2 points at origination. The prevailing rate in the market for similar FRM loans is 6.25%. Assume the following forecast of index rates. What is the amount of the payment due in each of months 25 through 36? Year Index Rate Forecast
0 2.00%
1 2.25%
2 2.50%
3 3.10%
4 4.15%
5 7.50%
6 5.50%
7 7.50%
8 8.00%
9 4.10%

Required:
a. At the start of year 2, what is the market value of Lary's ARM loan at a required yield of 5.5% assuming no prepayment?
b. What is the expected yield to the lender at origination from Lary's ARM loan assuming no prepayment?

Answers: 2

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