1. What is the present value of a $15 million pool of 15-year mortgages with an 8.5 per cent monthly mortgage coupon p.a. if market rates are 5 per cent? (Assume the mortgage-backed security guarantee fee is assumed to be 10 basis points and the bank servicing fee 40 basis points. Assume that the pass-through security is fully amortised.)

A. $ 14, 556, 926.4

B. $ 12, 084, 721.82

C. $ 18,127, 082.44

D. $ 15,000,000.00

E. No enough information to decide.

2.

Bank runs an FRA book, so it both buys and sells FRAs. It quotes a higher FRA rate to the buyer (borrower) and a lower FRA rate to the seller (investor) and earns the spread.

What is the return in dollars the bank can make of running the above FRA book under the following terms?

Bank as seller = FRA 10.5% Bank as buyer = FRA 10.4% Other terms:

Nominal value $1,000,000 Term 90 days Reference rate on the settlement date = 10% per annum

A. return equivalent to -$234.79

B. a return equivalent of $938.05

C. a zero return

D. None of the other options is correct.

E. a return equivalent to $1000