David is considering an adjustable rate mortgage loan with the following characteristics: • Loan amount: $250,000…

David is considering an adjustable rate mortgage loan with the
following characteristics: • Loan amount: $250,000 • Term: 30 years
• Index: one year T-Bill • Margin: 2% • Periodic cap: 2% • Lifetime
cap: none • Negative amortization: not allowed • Financing costs: 1
discount point and $5,500 in origination fees.
The Treasury bill yield is 6% at the outset and is expected to
increase to 8% at the beginning of the second year and to 13% at
the beginning of the third year. If David prepays the loan at the
end of the third year, what is the ARM’s effective borrowing
cost?