A borrower ARM has an initial rate of 3.5%, a 5/2/5 cap structure, and the index is now at 4.0% with a margin of 2.75%. What is the rate at the first adjustment?

Correct answer: 6.75%

Fully indexed rate = Index + Margin = 4.0% + 2.75% = 6.75%. The 5/2/5 cap structure means: first adjustment cap = 5%, periodic cap = 2%, lifetime cap = 5%. The rate cannot increase more than 5% from the initial rate at first adjustment (max 8.5%). Since 6.75% is within the 5% cap, the new rate is 6.75%.