Question

Sharon borrows an adjustable rate loan (ARM) of $100,000 with 3 year loan maturity. The initial interest rate for the loan is 8.5%, the margin is 3%, the loan amortization period is 15 years, the frequency of adjustment is 1 year (monthly compounding), There will be a discount point of 3% for the loan. Also, the index rates for the next 2 years are 11% and 8%, respectively. NOW suppose there is an annual interest rate cap of 2% specified in the loan contract, what will be the effective mortgage yield for borrowing this loan? Assume that no negative amortization is allowed. a.) 11.85% b.) 11.42% c.) 12.08% d.) 11.12% I got C wrong with my calculation. Please can you show me the work. Thank you

Answer 1

loan amt	$                         1,00,000.00
Int rate	8.50%
Margin	3%
Interate rate for the calc	11.50%	8.5%+3%
no. of yrs	15
Discount points	3%	this has to be added to the loan amount to arrive at the adjusted loan amount if no discount were given
Interest cap rate	2%
Monthly compounding	12	multiple factor
Discount points in USD	$                               3,000.00	100,000*3%
Loan amt adjusted in USD	$                         1,03,000.00	Discount points added to the loan amt
Payment per month	$                               1,203.24	pmt=?,r= 11.5%/12, n=15*12,pv=103000
Monthly rate	1.0040%	rate=?, n=15*12,pv=100000 (actual loan amt)
Yearly rate	12.048%	1%*12
Actual Mortgage Yeild is	11.429%	Cost incurred annually towards interest rate
	0.9525%	(1+12.048%)^(1/12)-1
	11.429%	0.952%*12
Option b. 11.42%