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*3. Use the following short rate tree. Short rate can increase or decrease in 6 months by equal probability. Use semi-annual compounding. Time 0 Time
*3. Use the following short rate tree. Short rate can increase or decrease in 6 months by equal probability. Use semi-annual compounding. Time 0 Time 0.5 Now, consider a 1 year mortgage (semi-annually paid) with a semi-annual mortgage rate of 10% and initial principal balance of $10,000. The mortgage is divided into three sequential pay tranches. Tranche A receives the first $3,000 of principal, tranche B receives the next $3,000 of principal, and tranche C receives the remaining $4,000 of principal. (FFill in the amortization schedule of the whole mortaa on helow 73. Use the following short rate tree. Short rate can increase or decrease in 6 months by equal probability. Use semi-annual compounding. Time 0 Time 0.5 Now, consider a 1 year, mortgage (semi-annually paid) with a semi-annual mortgage rate of 10% and initial principal balance of $10,000. The mortgage is divided into three sequential pay tranches. Tranche A receives the first $3,000 of principal, tranche B receives the next $3,000 of principal, and tranche C receives the remaining $4,000 of principal. (b) Fill the scheduled payments to the A,B, and C tranches, assuming no prepayment. (c) According to the interest tree, calculate 6-month discount factor for each node. Moreover, compute 1-year discount factor today. (d) Assuming that there are no prepayments, what is the value of (i) the whole mortgage? (ii) tranche A? (iii) tranche B
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