Which of the following two ARMs is likely to be priced higher, that is, offered with a higher initial interest rate?

a. ARM A has a margin of 3 percent and is tied to a three-year index with payments adjustable every two years; payments cannot increase by more than 10 percent from the preceding period; the term is 30 years.
b. ARM B has a margin of 3 percent and is tied to a one-year index with payments to be adjusted each year; payments cannot increase by more than 10 percent from the preceding period; the term is 30 years.

The issuers of Adjustable-Rate Mortgage adjust its rate based on a certain index in the market, the purpose of which is to reflect the current cost being incurred by the issuer for loaning out money.

Both these mortgages are similar in everything except the index period. ARM A has a longer index period which means that it is expose to more forward rates and as the yield curve is generally upward trending(interest rates are higher in future), ARM A will be offered at a higher interest rate.