The maximum interest rate that can be charged during the fifth year is 11.15%.
What is the annual ARM cap?
Annual ARM cap is an interest rate limit, which limits the possible increment in the interest rate.
Given information-
A bank advertises a 2/1 ARM at 5.15% with a 2/6 cap.
- A 2/1 arm means that the fixed interest rate is start for the first two years. This suggest that the interest rate adjust each year after the first three year is spend.
- The values 2/6 cap suggest that the increment in the interest rate is 2 percent every time, when there is an interest rate increases.
- The value 6 in 2/6 cap suggest that the maximum increase in interest rate can only be 6 percent.
Now the number of year given in the problem is 5 year.
Thus for the 2 years the interest rate would be fixed, which is 5.15%.
- Now for the 3rd year the interest rate increase with 2 percent. Thus the interest rate for the 3rd year is,
[tex]r=5.15+2\\r=7.15[/tex]
- Now for the 4th year the interest rate increase with 2 percent. Thus the interest rate for the 4th year is,
[tex]r=7.15+2\\r=9.15[/tex]
- Now for the 5th year the interest rate increase with 2 percent. Thus the interest rate for the 5th year is,
[tex]r=9.15+2\\r=11.15[/tex]
Thus the interest rate for the fifth year is 11.15 percent which also satisfy the 2/6 cap which says the maximum increase in interest rat can only be 6 percent.
hence the maximum interest rate that can be charged during the fifth year is 11.15%.
Learn more about the annual ARM cap here;
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