Contract Rate is index plus Margin to get what the interest rate should be if it is a similar FRM instead of an ARM

Contract Rate is index plus Margin to get what the interest rate should

be if it is a similar FRM instead of an ARM. PR = Pay rate and what you will pay for the ARM each year. 
So let's say we have a 30 year ARM at 4% for $150,000. To get the payment you calculate it like normal. Then to get the balance, you say new n = 12, cpt FV. That answer is your balance year 1 and your PV for year 2. The key is getting the right interest rate (PR or pay rate) each year. 


1)


A.
Douglas is considering an ARM with the following characteristics: Mortgage Amount = $100,000, Index Yield for Year 1 = 6%, Margin = 2.5%, Annual Cap = 2%, Lifetime Cap = 6%, Loan Maturity = 30 years, Inflation for the next year is 1.5% and the Teaser Rate is 6%. What is the balance at the end of year two?








B.   
 Boone is considering an ARM with the following characteristics: Mortgage Amount = $250,000, Teaser Rate = 7.75%, Index Value = 8.75%, Inflation Rate for the Index = 1.5% per Year, Margin = 2.0%, Annual Cap = 1%, Lifetime Cap = 5%, Loan Maturity = 15 Years. What is the balance at the end of year three?