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3. Consider a pool consisting of 15 commercial mortgages: All 15 mortgages interest-only, annual payments in arrears All 15 mortgages are non-recourse, with lockouts preventing
3. Consider a pool consisting of 15 commercial mortgages: All 15 mortgages interest-only, annual payments in arrears All 15 mortgages are non-recourse, with lockouts preventing prepayment * 5 loans mature in 1 year, 5 in 2 years, and 5 in year 3 Each loan par value (OLB)-$10 million Each loan coupon (contract) int, rate = 10% Two classes of securities are issued with these 15 mortgages as collateral Securit Face Value $100,000,000 $45,000,000 Coupon Rate 3% 10% Yield 370 11% a. What are the prices of these two tranches? b. If two mortgages default in year 3, and each recovers $5 million. What are the realized yields of these two tranches? c. Suppose that the issuer paid $150 million dollars to buy these mortgages and spend $200,000 dollars as expenses during the process, what is the return the issue is expected to earn? (Hint: the IRR of the issuer actual cash flows) 3. Consider a pool consisting of 15 commercial mortgages: All 15 mortgages interest-only, annual payments in arrears All 15 mortgages are non-recourse, with lockouts preventing prepayment * 5 loans mature in 1 year, 5 in 2 years, and 5 in year 3 Each loan par value (OLB)-$10 million Each loan coupon (contract) int, rate = 10% Two classes of securities are issued with these 15 mortgages as collateral Securit Face Value $100,000,000 $45,000,000 Coupon Rate 3% 10% Yield 370 11% a. What are the prices of these two tranches? b. If two mortgages default in year 3, and each recovers $5 million. What are the realized yields of these two tranches? c. Suppose that the issuer paid $150 million dollars to buy these mortgages and spend $200,000 dollars as expenses during the process, what is the return the issue is expected to earn? (Hint: the IRR of the issuer actual cash flows)
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