Consider an adjustable rate mortgage (ARM) of $190,000 with a maturity of 30 years and monthly payments. At the end of each year, the interest rate is adjusted to become 2.5 percentage points above the index. There is an annual cap of 250 basis points, and a lifetime cap of 500 basis points (i.e., with 2.5/5 interest rate caps). The lender offers a teaser of 1.00% for the first year. The following are the current and index rates: Time T-Bill Yield (given) At origination (for yr 1) 4.50% At end of yr 1 (for yr 2) 7.00% At end of yr 2 (for yr 3) 9.00% At end of yr 3 (for yr 4) 5.00% At end of yr 4 (for yr 3) 8.00% # 1). What is the contract rate for years 1, 2, 3, and 4? 3.50%, 4.00%, 8.00%, 5.00% 4.50 %, 6.00%, 10.00%, 7.00% 6.00%, 8.50 %, 11.00%, 7.00% 6.50%, 9.00%, 10.00%, 7.00% O 6.00%, 9.00%, 10.00%, 7.00% 05 50%, 6.00%, 9.00%, 7.00%
Consider an adjustable rate mortgage (ARM) of $190,000 with a maturity of 30 years and monthly payments. At the end of each year, the interest rate is adjusted to become 2.5 percentage points above the index. There is an annual cap of 250 basis points, and a lifetime cap of 500 basis points (i.e., with 2.5/5 interest rate caps). The lender offers a teaser of 1.00% for the first year. The following are the current and index rates: Time T-Bill Yield (given) At origination (for yr 1) 4.50% At end of yr 1 (for yr 2) 7.00% At end of yr 2 (for yr 3) 9.00% At end of yr 3 (for yr 4) 5.00% At end of yr 4 (for yr 3) 8.00% # 1). What is the contract rate for years 1, 2, 3, and 4? 3.50%, 4.00%, 8.00%, 5.00% 4.50 %, 6.00%, 10.00%, 7.00% 6.00%, 8.50 %, 11.00%, 7.00% 6.50%, 9.00%, 10.00%, 7.00% O 6.00%, 9.00%, 10.00%, 7.00% 05 50%, 6.00%, 9.00%, 7.00%
Chapter19: Lease And Intermediate-term Financing
Section: Chapter Questions
Problem 10P
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Mortgages
A mortgage is a formal agreement in which a bank or other financial institution lends cash at interest in return for assuming the title to the debtor's property, on the condition that the obligation is paid in full.
Mortgage
The term "mortgage" is a type of loan that a borrower takes to maintain his house or any form of assets and he agrees to return the amount in a particular period of time to the lender usually in a series of regular equally monthly, quarterly, or half-yearly payments.
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