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Freddie Mac owns 3 mortgages, each of which will pay off $1 million in present value 60% of the time and $0 million 40% of
Freddie Mac owns 3 mortgages, each of which will pay off $1 million in present value 60% of the time and $0 million 40% of the time. The payoffs of the three mortgages are independent. Freddie Mac issues a CMO where the owner of the equity tranche receives $1 million if and only if no mortgage defaults (that is, so long as all mortgages pay back $1 million). What is the expected value of this CMO? Choose the nearest answer. a. $936,000 b. $400,000 c. $600,000 d. $216,000
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