3. Answer the following questions related to MBS. (24 points) a) Mortgage rate is an important factor triggering prepayment activity. Three aspects of the mortgage rate have an impact on prepayment (e.g., the level of mortgage rate). Discuss how each of the three aspects influences prepayment. b) Indicate whether you agree or disagree with the following statement: The PSA prepayment benchmark is a model for forecasting prepayments for a pass-through security." c) What are the limitations of cash flow yield measures for a mortgage pass-through security? d) The Fannie Mae MBS are backed by a mortgage pool with an original pool balance of $400 million and a current pool factor (pf) of 0.91. MBS have a 4.75% pass-through (PT) rate and a clean price quote of 101 -27 (Note: quote is in 1/32). The time period for calculating the accrued interest is 12 days of 30 days in a month. What is the full market value (including clean price and accrued interest) of this MBS? (Round $ millions to 2 decimal places, e.g., $1.23 million) e) Based on the current par value of $400 million of pass-through securities, $320 million was classified as the senior class and the remaining $80 million was the subordinated class. Please calculate the loss ratio or percentage loss/original par amount of class) for each class if the total default loss is $88 million of principal. f) Suppose we add a shift-interest structure to the $400 million par value pass-through securities described in part (f) above, and this structure determined at issuance is as follows: In months 1-12, percentage of prepayments directed to senior class is 93%; in months 13-24, 87%; and in months 25-60, 75%. Assume the $400 million par value is the amount outstanding at the end of year 1 and the total principal payment received during year 2 is $25 million ($19 million regular principal payment and $6 million prepayment). Please show how subordination level changes from the end of year 1 to the end of year 2. Subordination level = par value of subordinate class/par value of total issue. Assume no default losses. Extend the scenario in part (g): Assume the total principal payment received during year 3 is $16 million $12 million regular principal and $4 million prepayment). Calculate the subordination level at the end of year 3. Assume no default losses. 3. Answer the following questions related to MBS. (24 points) a) Mortgage rate is an important factor triggering prepayment activity. Three aspects of the mortgage rate have an impact on prepayment (e.g., the level of mortgage rate). Discuss how each of the three aspects influences prepayment. b) Indicate whether you agree or disagree with the following statement: The PSA prepayment benchmark is a model for forecasting prepayments for a pass-through security." c) What are the limitations of cash flow yield measures for a mortgage pass-through security? d) The Fannie Mae MBS are backed by a mortgage pool with an original pool balance of $400 million and a current pool factor (pf) of 0.91. MBS have a 4.75% pass-through (PT) rate and a clean price quote of 101 -27 (Note: quote is in 1/32). The time period for calculating the accrued interest is 12 days of 30 days in a month. What is the full market value (including clean price and accrued interest) of this MBS? (Round $ millions to 2 decimal places, e.g., $1.23 million) e) Based on the current par value of $400 million of pass-through securities, $320 million was classified as the senior class and the remaining $80 million was the subordinated class. Please calculate the loss ratio or percentage loss/original par amount of class) for each class if the total default loss is $88 million of principal. f) Suppose we add a shift-interest structure to the $400 million par value pass-through securities described in part (f) above, and this structure determined at issuance is as follows: In months 1-12, percentage of prepayments directed to senior class is 93%; in months 13-24, 87%; and in months 25-60, 75%. Assume the $400 million par value is the amount outstanding at the end of year 1 and the total principal payment received during year 2 is $25 million ($19 million regular principal payment and $6 million prepayment). Please show how subordination level changes from the end of year 1 to the end of year 2. Subordination level = par value of subordinate class/par value of total issue. Assume no default losses. Extend the scenario in part (g): Assume the total principal payment received during year 3 is $16 million $12 million regular principal and $4 million prepayment). Calculate the subordination level at the end of year 3. Assume no default losses