DDR Bank Limited originates a pool of 450 mortgages, each with 30-year maturity and averaging $350,000 with an annual mortgage coupon rate of 8.5 percent. Assume that the risk adjusted market annual rate of return is also 8.5 percent compounded monthly. The mortgage-backed security insurance fee is 80 basis points and DDR Banks servicing fee is 20 basis points.

Requirements:

i. What are the expected monthly cash flows to securitized bondholders? [1 mark]

ii. What is the present value of the pass-through security bonds? [1 mark]

iii. What are DDR Banks expected monthly cash flows? [1 mark]

iv. Write a short report to the Chief Risk Officer on how DDR Bank can use securitisation to manage its risk exposures. Be sure to consider interest rate, currency, liquidity and credit risks. [4 marks]