An investor is considering the purchase of either an 10 or PO strip from a CMO offering. The portion of the mortgage pool backing this tranche consists of $1.09 million in mortgages with a remaining maturity of 10 years and an 8 percent interest rate. Required: a1. Assuming annual payments and a zero prepayment rate, prepare a schedule showing the 10 and PO cash flows that would be payable to investors in this tranche. a2. If the interest rate demanded by investors on this investment is also 8 percent, what would be the prices of the 10 and PO strips? b. If interest rates increased to 10 percent and prepayments remained at a zero rate, how would the price of the 10 and PO strips change? What is the percentage price change of each security? c. Investor interest rates now decline to 6 percent. What is the price of the IO? PO? Prepayments now increase to a rate of 20 percent per year because mortgage borrowers in the pool begin to refinance at lower interest rates. What would prices for the 10 and PO be now? (Assume that the 20% prepayment received at the end of each year is based on the outstanding loan balances at the end of the preceding year.) What is the percentage price change of each security? Assuming annual payments and a zero prepayment rate, prepare a schedule showing the IO and PO cash flows that would be payable to investors in this tranche. (Do not round intermediate calculations. Round your final answer to nearest whole dollar.) Beginning Interest Principal PO Ending Balance TO/Strip PO/Strip Prepayment Balance Period 1 Period 2 Period 3 Period 4 Period 5 Period 6 Period 7 Period 8 Period 9 Period 10 Required A1 Required A2 Required B Required If the interest rate demanded by investors on this investment is also 8 percent, what would be the prices of the IO and PO strips? (Do not round intermediate calculations. Round your final answer to nearest whole dollar.) 10/Strip PO/Strip PV or Price at 8% Complete this question by entering your answers in the tabs below. Required A1 Required A2 Required B Required C If interest rates increased to 10 percent and prepayments remained at a zero rate, how would the price of the 10 and PO strips change? What is the percentage price change of each security? (Do not round intermediate calculations. Round your final answer to nearest whole dollar. Round your answers for "% change in price" to 2 decimal places.) 10/Strip PO/Strip PV or Price at 10% Percentage change in price % Complete this question by entering your answers in the tabs below. Required A1 Required A2 Required B Required Investor interest rates now decline to 6 percent. What is the price of the 10? PO? Prepayments now increase to a rate of 20 percent per year because mortgage borrowers in the pool begin to refinance at lower interest rates. What would prices for the 10 and PO be now? (Assume that the 20% prepayment received at the end of each year is based on the outstanding loan balances at the end of the preceding year.) What is the percentage price change of each security? (Do not round intermediate calculations. Round your final answer to nearest whole dollar. Round your answers for "% change in price" to 2 decimal places.) Show less A 1O/Strip PO/Strip Cash flow schedule at 0% prepayment, PV or Price at 6% Cash flow schedule at 20% prepayment, PV or Price at 6% Percentage change in price % % An investor is considering the purchase of either an 10 or PO strip from a CMO offering. The portion of the mortgage pool backing this tranche consists of $1.09 million in mortgages with a remaining maturity of 10 years and an 8 percent interest rate. Required: a1. Assuming annual payments and a zero prepayment rate, prepare a schedule showing the 10 and PO cash flows that would be payable to investors in this tranche. a2. If the interest rate demanded by investors on this investment is also 8 percent, what would be the prices of the 10 and PO strips? b. If interest rates increased to 10 percent and prepayments remained at a zero rate, how would the price of the 10 and PO strips change? What is the percentage price change of each security? c. Investor interest rates now decline to 6 percent. What is the price of the IO? PO? Prepayments now increase to a rate of 20 percent per year because mortgage borrowers in the pool begin to refinance at lower interest rates. What would prices for the 10 and PO be now? (Assume that the 20% prepayment received at the end of each year is based on the outstanding loan balances at the end of the preceding year.) What is the percentage price change of each security? Assuming annual payments and a zero prepayment rate, prepare a schedule showing the IO and PO cash flows that would be payable to investors in this tranche. (Do not round intermediate calculations. Round your final answer to nearest whole dollar.) Beginning Interest Principal PO Ending Balance TO/Strip PO/Strip Prepayment Balance Period 1 Period 2 Period 3 Period 4 Period 5 Period 6 Period 7 Period 8 Period 9 Period 10 Required A1 Required A2 Required B Required If the interest rate demanded by investors on this investment is also 8 percent, what would be the prices of the IO and PO strips? (Do not round intermediate calculations. Round your final answer to nearest whole dollar.) 10/Strip PO/Strip PV or Price at 8% Complete this question by entering your answers in the tabs below. Required A1 Required A2 Required B Required C If interest rates increased to 10 percent and prepayments remained at a zero rate, how would the price of the 10 and PO strips change? What is the percentage price change of each security? (Do not round intermediate calculations. Round your final answer to nearest whole dollar. Round your answers for "% change in price" to 2 decimal places.) 10/Strip PO/Strip PV or Price at 10% Percentage change in price % Complete this question by entering your answers in the tabs below. Required A1 Required A2 Required B Required Investor interest rates now decline to 6 percent. What is the price of the 10? PO? Prepayments now increase to a rate of 20 percent per year because mortgage borrowers in the pool begin to refinance at lower interest rates. What would prices for the 10 and PO be now? (Assume that the 20% prepayment received at the end of each year is based on the outstanding loan balances at the end of the preceding year.) What is the percentage price change of each security? (Do not round intermediate calculations. Round your final answer to nearest whole dollar. Round your answers for "% change in price" to 2 decimal places.) Show less A 1O/Strip PO/Strip Cash flow schedule at 0% prepayment, PV or Price at 6% Cash flow schedule at 20% prepayment, PV or Price at 6% Percentage change in price % %
