1) A PO and IO class of securities is formed backed by a $7,500,000 pool of 10-year FRMs making annual payments with a 10% interest rate. What is the present value of the IO class if the discount/market rate is 11%? Excel is recommended for this problem.

2) Consider a sequential pay CMO that is backed by 100 mortgages with average balance of $150,000 each. The mortgages have monthly payments with WAM = 30 years and WAC = 6%. There is a servicing fee of 0.4% and prepayment is according to 150% PSA. Tranche A holds $6,000,000 of the mortgage pool principal at origination, tranche B holds $3,000,000 and tranche Z holds $5,000,000. The rest of the pool principal is held by the SPV as a residual. The SPV has set a pass-through rate (coupon rate net of the servicer/guarantee fee) of 4% for Tranche A, 4.5% for Tranche B and 5% for Tranche Z. What is tranche A's outstanding principal balance at the end of the first month (beginning of the second month)?

3) Same as Question 2, consider a sequential pay CMO that is backed by 100 mortgages with average balance of $150,000 each. The mortgages have monthly payments with WAM = 30years and WAC = 6%. There is a servicing fee of 0.4% and prepayment is according to 150% PSA. Tranche A holds $6,000,000 of the mortgage pool principal at origination, tranche B holds $3,000,000 and tranche Z holds. The rest of the pool principal is held by the SPV as a residual. The SPV has set apass-through rate (coupon rate net of the servicer/guarantee fee) of 4% for Tranche A, 4.5% for Tranche B and 5% for Tranche Z. What is the cash flow to the residual tranche in month 1?

4) Consider a sequential pay CMO that is backed by 125 mortgages with average balance of $100,000 each. The mortgages have monthly payments with WAM = 15 years and WAC =7%. There is a servicing fee of 0.3% and prepayment is according to 200% PSA. Tranche A holds $7,000,000 of the mortgage pool principal at origination, tranche B holds $3,000,000 and tranche Z holds $2,000,000. The rest of the pool principal is held by the SPV as a residual. The SPV has set a pass-through rate (coupon rate net of the servicer/guarantee fee) of 5.5% for Tranche A, 5.75% for Tranche A and 6.5% for Tranche A. At the beginning of month 7, the overall mortgage pool balance has 11,707,271.70 of principal remaining. Of that overall principal at the beginning of month 7, Tranche A holds 6,607,465.99, Tranche B holds 3,000,000 and Tranche Z holds 2,065,886.59. What is tranche A's outstanding principal balance at the end of month 7 (beginning of month 8)?

5) Same as Question 4, consider a sequential pay CMO that is backed by 125 mortgages with average balance of $100,000 each. The mortgages have monthly payments with WAM = 15 years and WAC = 7%. There is a servicing fee of 0.3% and prepayment is according to 200% PSA. Tranche A holds $7,000,000 of the mortgage pool principal at origination, tranche B holds $3,000,000 and tranche Z holds $2,000,000. The rest of the pool principal is held by the SPV as a residual. The SPV has set a pass-through rate (coupon rate net of the servicer/guarantee fee) of 5.5% for Tranche A, 5.75% for Tranche A and 6.5% for Tranche A. At the beginning of month 7, the overall mortgage pool balance has 11,707,271.70 of principal remaining. Of that overall principal at the beginning of month 7, Tranche A holds 6,607,465.99, Tranche B holds 3,000,000 and Tranche Z holds 2,065,886.59. What is the cash flow to the residual tranche in month 7?

6) Check all true statements regarding TACs and Inverse TACs.

1) Inverse TACs protect against

contraction risk

2) TACs and Inverse TACs use

only one PSA factor prepayment

assumption threshold when

defining their cashflows

3) TACs protect against extension

risk

4) Inverse TACs protect against

extension risk

5) TACs protect against

contraction risk