4. Consider two CMO structures using the same $1 billion balance of MBS pools: Structure 1: $665 million PAC class, $335 million companion class Structure 2: $734 million PAC class, $266 million companion class 1 a) Which structure offers the most prepayment protection to the PAC class? 1 b) The option cost for the PAC class of which structure will be higher? Answers 5. Credit Swatch just structured a $1 billion CMO with $750 million allocated to the PAC class. The deal is off FNMA 30-year 4.5% coupon MBS. The companion class collateral will consist of a floater, an inverse IO and a super PO. In orer to sell the floater at a 35 bp DM (discount margin) off 1-month LIBOR, the floater must have a 6.25% cap. 1 a) What balance amount is allocated to the companion class? Answers Fltr Super PO 3 1 b) In order the create a 6.25% cap on the floater how much principal is allocated to the floater and how much is allocated to the super PO? c) What is the cap on the inverse IO? Cpn 1 d) What is the coupon formula for the inverse IO? Fltr 2 e) Suppose LIBOR is 3%, what are the floater and inverse IO coupons? 6. Consider the following 3-year bond that pay an annual 7% coupon and is callable on the first coupon date with a call price of $101.5. The interest rates in the tree are the calibrated forward rates plus the OAS - figure below provided. 5 a) What is the price of the callable bond? 2 b) Suppose the non-callable 3-year bond with a 7% coupon is priced $101.75, what is the option cost for the callable bond?