Problem #2 --
What is the yield on the following 1-year adjustable rate mortgage?
the lenders expected yield (assume a holding period of term) for the following
loan if 1-Year Treasury yields are expected to be 5% today, 8% 12 months from now, and
ARM description -
Rate resets every year.
Fully adjusted rate = Index + 2%.
Index = 1-Year Treasury yield at reset date.
Lifetime Cap of 9%.
Period change cap of 2 percentage pints (200 bps)
No other caps, floors, or max adjustments.
Teaser rate of 5%
30-year loan with no points or fees.
Loan amount $400,000
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