1. What is the meaning of the following: Interest is capped at 2%/5%.

Homework 3 Name:

1. What is the meaning of the following: Interest is capped at 2%/5%.

A. The loan has a 2% annual cap rate and a 5% lifetime cap rate.

B. The borrower can choose the cap he wants by simply circling the appropriate choice.

C. The loan has a 2% lifetime cap rate and a 5% annual cap rate.

D. The loan has a 2% annual cap rate and a 5% floor cap rate.

2. Which of the following descriptions most accurately reflects the risk position of an ARM lender in comparison to that of a FRM lender?

	Interest Rate Risk	Default Risk
(A)	Higher	Higher
(B)	Lower	Lower
(C)	Higher	Lower
	Lower	Higher

A. Option A

B. Option B

C. Option C

D. Option D

3. Which is NOT a component of an ARM?

A. A margin

B. An index

C. A chapter

D. Caps

4. A borrower takes out a 30-year adjustable rate mortgage loan for $200,000 with monthly payments. The first two years of the loan have a “teaser” rate of 4%, after that, the rate can reset with a 5% annual payment cap. On the reset date, the composite rate is 6%. Assume that the loan allows for negative amortization. What would be the outstanding balance on the loan at the end of Year 3?

A. $190,074

B. $192,337

C. $192,812

D. $192,926