Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Athens First S&L originated a pool containing 75 ten-year fully amortizing fixed interest rate mortgages with an average balance of $100,000 each. All mortgages in
Athens First S&L originated a pool containing 75 ten-year fully amortizing fixed interest rate mortgages with an average balance of $100,000 each. All mortgages in the pool carry an interest rate of 12% and have annual payments.
- Suppose the bond investors buy the MPTs assuming the 10% prepayment rate and 0% default rate as in question (2). However, suppose that in reality there are no prepayments, but there are 10% of default losses each year (for simplicity, assume that 10% of the pools principal balance is lost each year to default, except for the final year, in which there will be no defaults; default losses in year Y will be 10% x pool beginning balance in year Y).[1]
- What is the realized IRR to MPT investors?
- What price would investors have paid for each individual security if their discount rate was 10.5%, but they correctly forecast the cash flows (e.g. 10% default, 0% prepayment).
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started