Fin 4713 Chapter 06 Homework
Problem A. For a GPM mortgage of $200000 at 7% that starts with a payment of 1100 per month
and increases by 8% each anniversary date, how much interest will be paid in year 2, and what is
the balance at the end of year 2?
Problem B. Use the following data for the next 14 questions. You have applied for a $225,000,
30-year ARM mortgage with the features noted below. Payments and interest rates are adjusted
each year. You will stay in the house for three years.
Initial Interest rate = X.XXX% (In effect for first year, i.e. Year 1)
Index = XXXXX Margin = X.XXX%
Interest Rate Cap: XXX/XXX Payment Cap: XX % up or down each year
Negative Amortization: XXXXX Discount Points = X.X
Assume the index changes over time as noted in the table below.
Year Index Int. Rate
Charged Monthly
Payment Amount Paid
to Interest EOY Balance
1 N/A
2 y.yyy%
3 q.qqq%
The first 12 questions are to fill in the blanks in the table above
13. What is the yield to the lender, expressed as an APR?
14. What is the yield to the lender, expressed as an EAY?
Example B1:
Initial Interest rate = 3.50% (In effect for first year, i.e. Year 1)
Index = 4.18 Margin = 2.000%
Interest Rate Cap: None Payment Cap: None
Negative Amortization: N/A Discount Points = 1.5
Assume the index changes over time as noted in the table below.
Year Index Int. Rate
Charged Monthly
Payment Amount Paid
to Interest EOY Balance
1 N/A
2 6.25%
3 8.75%
The first 12 questions are to fill in the blanks in the table above
13. What is the yield to the lender, expressed as an APR? 7.86%
14. What is the yield to the lender, expressed as an EAY?
