Lary is considering an ARM loan offered by a local lender. The loan amount is $300,000. The term of the loan is 10 years. The index today is 2%. The margin on the loan is 2%. The teaser (first year only) is 1%. The composite rate adjusts annually and is subject to annual and lifetime caps of 2% and 5%. The loan does not provide for negative amortization nor does it provide floors. The loan requires 2 points at origination. The prevailing rate in the market for similar FRM loans is 6.25%. Assume the following forecast of index rates. What is the amount of the payment due in each of months 25 through 36? Year Index Rate Forecast
0 2.00%
1 2.25%
2 2.50%
3 3.10%
4 4.15%
5 7.50%
6 5.50%
7 7.50%
8 8.00%
9 4.10%

Required:
What is the expected yield to the lender at origination from Lary's ARM loan assuming no prepayment? At the start of year 2, what is the market value of Lary's ARM loan at a required yield of 5.5%?