Question

In: Finance

A basic arm is made for $200000 at an initial interest rate of 6 percent for...

A basic arm is made for $200000 at an initial interest rate of 6 percent for 30 years with an annual reset date. The borrower believes that the interest rate at the beginning of year 2 will increase to 7 percent.

(a) Assuming that a fully amortizing loan is made, what will the monthly payments be during year 1?

(b) Based on (a), what will the loan balance be at the end of year 1?

(c) Given that the interest rate is expected to be 7 percent at the beginning of year 2, what will the monthly payments be during year 2?

Solutions

Expert Solution

Sol:

Present value (PV) = $200,000

Interest rate (r) = 6% (Monthly) = 6%/12 = 0.50%

Period (nper) = 30 (Monthly) = 30 x 12 = 360

Monthly payment (PMT)

a) To determine monthly payments be during year 1: (Formula in excel sheet)

=PMT(rate,nper,pv,0)

=PMT(0.50%,360,200,000,0)

PMT = $1,199.10

PV	200000
Interest rate	0.50%
nper	360
Monthly payment (PMT)	1199.10

Therefore monthly payments be during year 1 is $1,199.10

Interest rate (r) = 6% (Monthly) = 6%/12 = 0.50%

Period (nper) = 29 (Monthly) = 29 x 12 = 348

Monthly payment (PMT) = $1199.10

Loan balance (PV)

Based on (a), loan balance be at the end of year 1: (Formula in excel sheet)

= PV(rate,nper,PMT,0)

= PV(0.50%,348,1199.10,0)

PV = $197,543.80

PMT	1199.1
Interest rate	0.50%
nper	348
Loan balance (PV)	197543.80

Therefore loan balance be at the end of year 1 is $197,543.80

Interest rate (r) = 7% (Monthly) = 7%/12 = 0.58333333%

Period (nper) = 29 (Monthly) = 29 x 12 = 348

PV = $197,543.80

Monthly payment (PMT)

Given that the interest rate is expected to be 7 percent at the beginning of year 2, monthly payments be during year 2 will be: (Formula in excel sheet)

=PMT(rate,nper,pv,0)

=PMT(0.58333333%,348,197,543.80,0)

PMT = $1327.75

PV	197543.8
Interest rate	0.58%
nper	348
Monthly payment (PMT)	1327.75

Therefore beginning of year 2, monthly payments be during year 2 will be $1327.75

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

A basic ARM is made for $250, 000 at an initial interest rate of 6% for...

A basic ARM is made for $250, 000 at an initial interest rate of 6% for 30 years with an annual reset date. The borrower believes that the interest rate at the beginning of year 2 will increase to 8 percent. a. Assuming that a fully amortizing loan is made. What is the monthly payment during year 2? b. What would be the monthly payments in year 2 if it is an interest-only ARM loan for the first two years?...

A basic ARM is made for $250, 000 at an initial interest rate of 6% for...

A basic ARM is made for $250, 000 at an initial interest rate of 6% for 30 years with an annual reset date. The borrower believes that the interest rate at the beginning of year 2 will increase to 8 percent. Assuming that fulling amortizing is made and negative amortization is allowed if payment cap reached. If the ARM loan has a maximum 5% annual increase payment cap, what is the monthly payment during year 2?

An Adjustable Rate Mortgage (ARM) is made for $300,000 at an initial interest rate of 2...

An Adjustable Rate Mortgage (ARM) is made for $300,000 at an initial interest rate of 2 percent for 30 years. The ARM will be adjusted annually. The borrower believes that the interest rate at the beginning of the year (BOY) 2 will increase to three percent (3%). a. Assuming that the ARM is fully amortizing, what will monthly payments be during year 1? b. Based on (a) what will the loan balance be at the end of year (EOY) 1?...

An ARM is made for $50,000 for 30 years with the following terms: Initial interest rate...

An ARM is made for $50,000 for 30 years with the following terms: Initial interest rate = 1 percent Index = 1-year Treasuries Payments reset each year Margin = 200 basis points Interest rate cap = none Payment cap = none Discount points = 1 point Negative amortization is not allowed 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)...

An ARM is made for $150,000 for 30 years with the following terms: Initial interest rate...

An ARM is made for $150,000 for 30 years with the following terms: Initial interest rate = 3% Index = 1-year Treasuries Payments reset each year Margin = 2 percent Fully amortizing Interest rate cap = 1 percent annually; 3 percent lifetime Estimated forward rates: BOY 2 4.00% BOY 3 5.25% BOY 4 6% BOY 5 6.50% Compute payments and balances for each of the years 1-5.

An ARM is made for $200,000 for 30 years with the following terms: Initial interest rate...

An ARM is made for $200,000 for 30 years with the following terms: Initial interest rate = 3% Index = 1-year Treasuries Payments reset each year Margin = 2 percent Fully amortizing Estimated forward rates: BOY 2 4.50% BOY 3 5.25% BOY 4 6% BOY 5 6.50% Compute payments and balances for each of the years 1-5.

The U.S. interest rate is7 percent and the Canadian dollar’s interest rate is 6 percent. The...

The U.S. interest rate is7 percent and the Canadian dollar’s interest rate is 6 percent. The Canadian dollar's forward rate has a premium of 2 percent. (1) Calculate the effective financing rate for U.S. firms. (2) Does interest rate parity hold? (3) Could U.S. firms lock in a lower financing cost by borrowing Canadian dollars and purchasing Canadian dollars forward for one year? Explain.

You have taken out a $150,000, 5/1 ARM. The initial rate is 2%. The interest rate...

You have taken out a $150,000, 5/1 ARM. The initial rate is 2%. The interest rate after the initial lock period is 4%. The term on this 5/1 ARM is 30 years. What is the total amount of interest paid during the initial lock period?

A borrower takes out a 5/1 Hybrid ARM for $200,000 with an initial contract interest rate...

A borrower takes out a 5/1 Hybrid ARM for $200,000 with an initial contract interest rate of 3.5%. The interest rate will adjust according to the 1 yr LIBOR rate, plus a margin of 2%. At the first reset date, 1 yr LIBOR is at 1%. What will the borrowers’ monthly payment be immediately after the first reset? (State the payment as a positive number. Unless otherwise stated, you can assume 5/1 ARMs have a term of 30 years. Round...

A mortgage loan is made for $80,000 at 6 percent interest for 25 years. Payments are...

A mortgage loan is made for $80,000 at 6 percent interest for 25 years. Payments are to be made monthly. Calculate. 1. Total monthly interest and principal payments through year 10. 2. What would the breakdown of interest and principal be during month 50?

Subjects