If an ARM index increased 15%,the negative amortization on a loan with a 5% annual payment cap is calculated by:

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Negative amortization occurs when the interest on a loan exceeds the amount of the payment being made. In the case of an ARM with a payment cap, the payment is capped at 5%, which means that any interest above that amount is added to the principal balance. Therefore, when the ARM index increases by 15%, the payment may not be enough to cover the interest, causing negative amortization. In order to calculate the amount of negative amortization, we must compound the difference between the payments as if no cap existed and with the 5% capped payment. This will give us a more accurate measure of the increase in the principal balance due to the interest. So, choice D is the best option.

If an ARM Index Increased 15%,the Negative Amortization on a Loan