Consider a ten-year, fixed-rate mortgage of $500,000 that has an interest rate of 12 percent. For simplification,

Question:

Consider a ten-year, fixed-rate mortgage of $500,000 that has an interest rate of 12 percent. For simplification, assume that payments are made annually.
a. Determine the amortization schedule.
b. Using your answer in part a, determine the value of both IO and PO strips with a of 10 percent under the assumption that the mortgage will not be prepaid.
c. Now compute again the values of the IO and PO under the assumption that interest rates immediately fall to 8 percent and the mortgage is prepaid in year 6.
d. Explain the risk characteristics of IO and PO strips? Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...