Consider the Following Fully-Amortizing 4-Year ARM Contract Interest Rate Can

question 2

Essay

Consider the following fully-amortizing 4-year ARM contract interest rate can change once every 48 months) with 12-year maturity, monthly payments. The ARM has initial interest rate 4% with 1 point, caps are 2% per jump, 6% lifetime, margin is 300 basis points, index is LIBOR currently at 4.5%. Under the "straight line" assumption about future interest rates i.e., assuming the market rate on the index remains constant), what is the yield to maturity? Show your work if you want to possibly get partial credit.)

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