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...Can anyone please help c) Ali Musa is an alternative investments manager at Venus Capital. He is considering analysing a two franche (a PAC 1

...Can anyone please help

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c) Ali Musa is an alternative investments manager at Venus Capital. He is considering analysing a two franche (a PAC 1 tranche and a support tranche) from a collatelarised mortgage obligation (CMO) that was issued 18 months ago. When the CMO was issued, the initial collar of the PAC tranche was 150-400 PSA. He estimates the change in the average life of each tranche as the prepayment speed varies, assuming the prepayment speed stays at that speed until the tranche matures. The results are as shown in the table: Average life of tranche XX and tranche YY for varying prepayment speeds: Average Life PSA speeds Tranche XX Tranche YY 0 21.9 12.2 50 17.5 8.9 100 13.2 5.1 150 9.1 5.1 200 4.3 5.1 250 3.6 5.1 300 2.9 5.1 350 2.0 4.7 400 14 3.9 Note: . PSA is the public securities association, a model for analysing mortgage-backed securities. PAC is the planned amortization class. Required: Determine the most likely support tranche. ii. Determine the effective collar of PAC 1 Tranche.b) Discuss how each of the following factors would most likely affect the prepayment risk of the mortgage- backed pass through securities. i. Coupon rate of the mortgage. ii. Age of the mortgage. iii. Seasonality. d) An investor owns two 30 year original maturity mortgage-backed securities (MBS), (MBS-A and MB'S -B). He uses the 10-year Treasury yield as a relative measure to gauge the level of current 30 year home mortgage rates. Over the past four years, the 10-year Treasury yield has declined below 5.50% three times, subsequently rising above 6.50% each time. The 10-year Treasury yield is currently at 6.50%. The following information relates to the two mortgage-backed securities: Issue Coupon Weighted average Price Current Month (%) maturity (months) (sh.) PSA CPR MBS-A 7.50 355 100 500 5 MBS-B 7.50 260 100 200 12 Note: . . PSA is the prepayment scale developed by Public Securities Association (PSA) for analyzing mortgage-backed securities. . CPR is the conditional prepayment rate, a loan prepayment rate equal to the proportion of the principal of a pool of loans assumed to be paid off prematurity in each period. Required: i. Explain the difference in the prepayment sensitivity of the two securities assuming a future decline in the 10-year Treasury yield of slightly more than 100 basis points. ii. Determine with reasons, the security that would realize a higher percentage of principal prepayment, based on the current month PSA and CPR prepayment data. ili. Describe two reasons why prepayments are likely to be more stable for automobile receivable asset-backed securities when compared to similar duration mortgage-backed securities.e) A cash funded collateralised debt obligation (CDO) has a reference pool of assets that consists of 50 loans, The notional amount of each loan is Sh.5 million. The mezzanine tranche for this CDO has a notional value of Sh.20 million, and the spread is 90 basis points. The loss given default is 60%. The mezzanine tranche has a lower attachment point of 2% and a tranche width of 3%. Required: The loss for the mezzanine tranche if six defaults occur.c) An asset backed security (ABS) structure has the following data: Senior tranche Sh.150 million Subordinate tranche A Sh.60 million Subordinate tranche B Sh.20 million The assets in the pool are worth Sh.250 million. Required: Determine the amount of losses at which the senior tranche investors would begin to lose money

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