Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Calculated by simply dividing the annual rate by 12.Consider a $400 million pass-through MBS that has just been created (so the 'seasoning' of the pass-through

Calculated by simply dividing the annual rate by 12.Consider a $400 million pass-through MBS that has just been created (so the 'seasoning' of the pass-through is equal to 0). The underlying pool of mortgages each has a maturity of 20 years and an annual mortgage coupon rate of 6%. The pass-through rate of the mortgage pool is 5%. Assuming a prepayment multiplier of 100 PSA what is the total amount of interest paid to the pass-through investors?Referring to the same mortgage pass-through of the previous question, what is the total amount of the prepayments? Referring to the same mortgage pass-through of the previous question, what is the total amount of the prepayments if the rate of prepayments increases to 200 PSA?

2.Suppose we construct principal-only (PO) and interest-only (IO) mortgage-backed securities (MBS) using the mortgage pass-through of the previous questions. Assume a prepayment multiplier of 100 PSA. What is the present value of the PO MBS if we use an annual risk-free rate of 4.5% to value the cash-flows?Referring to the previous question, what is the value of the IO MBS?Referring to the previous question, what is the average life of the IO MBS?

3.Suppose now that you purchased the IO MBS of the previous question and that the price you paid was the same price that you calculated in the previous question. The risk-free interest rate suddenly changes from 4.5% to 3.5%. Everything else stays the same. How much money have you made or lost on your investment?

4.Referring to the previous question, suppose the risk-free interest rate suddenly changes from 4.5% to 3.5% and that the pre-payment multiplier changes from 100 PSA to 150 PSA. How much money have you made or lost on your investment in the IO MBS?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Practical Financial Management

Authors: William R. Lasher

6th Edition

1439080496, 978-1439080498

More Books

Students also viewed these Finance questions

Question

The relevance of the information to the interpreter

Answered: 1 week ago

Question

The background knowledge of the interpreter

Answered: 1 week ago