1. Assume a mortgage pool, face value $1.050 billion ($1050 million or $1,050,000,000) and is guaranteed by Freddie Mac (US GSE) for issuing a seasoned agency pass-through that is designed as Planned Amortization Class (PAC) bonds with the following characteristics:

PAC Bond Class:Total face value $800 million. The PAC class has four tranches labeled P-A, with face value $300 million and a pass-through rate = 3.6%; P-B with face value $240 million and a pass-through rate = 4.2%; P-C with a face value $200 million and a pass-through rate = 4.8% and P-Z (accrual tranche) face value $50 million and a pass-through rate = 5.4%. This PAC class follows the sequential pay structure for the distribution of cash flows.

Support Bond class:Total face value $250 million and a pass-through rate = 6.6%.

Assume all the individual mortgages in the pool had initial maturity of 25 years but the pool is now seasoned by 8 months (ie WAM of 292 months), Assume a WAC of 5.70% and agency minimum payment guarantee band for the PAC at 90PSA or 180PSA. Assume also the standard fee for the Special Purpose Vehicle (SPV) is 18 basis points and the originator receives 32 basis points.

a. Identify the sources of credit enhancement for the PAC bonds

b. For month 1, calculate the following:

1. principal, interest and prepayment for the collateral.

2. Determine the distribution of cash flows to the tranches for month 1.

3. Determine the distribution of cash flows to the agents of the MBS for month 1.

4.If in month 1, borrowers prepay at an actual rate of 350PSA, due to a large drop in interest

rates, what is the likely amount that will be paid to PAC investors? To Non-PAC investors?