Question

A bank advertises 2/one arm at 2.75% with a 2/10 cap. What is the maximum interest rate that can be charged during the fifth year

Answer 1

The maximum interest rate that can be charged during the fifth year is 8.75%.

Step-by-step explanation:

To calculate the maximum interest rate that can be charged during the fifth year, we need to understand the terms given in the question.

• The bank is offering a loan with an initial interest rate of 2/one arm, which means the interest rate will remain fixed for the first two years.
• The interest rate is 2.75%.
• There is a cap of 2/10, which means the interest rate can increase by a maximum of 2% per year after the first two years.

Since the interest rate remains fixed for the first two years at 2/one arm (2.75%), we only need to calculate the maximum increase for the remaining three years.

The maximum increase allowed is 2% per year, so the maximum interest rate that can be charged during the fifth year is 2.75% + (2% * 3)

= 8.75%.