Homework 6: Due 12/9 (Please write your answers legibly) 1. If Congress changes the tax law to increase marginal income tax rates, what will happen to the price of municipal bonds? Why? We assume that other factors are constant. 2. What is the muni yield ratio, and why is it expected to be less than 1? 3. You plan to buy a $500,000 house using a 30-year fixed-rate mortgage obtained from your local bank. The mortgage rate offered to you is 6%. You will make a down payment of 20% of the purchase price ($500,000). (1) Calculate your monthly payments on this mortgage. (2) Construct an amortization schedule for the first 2 months. In other words, calculate the amount of interest and scheduled principal payment for the first 2 months. Follow the example posted on Moodle. (3) Calculate the amount of interest paid over the life of this mortgage. 4. Solve the following problems about mortgage-backed securities. Suppose Federal National Mortgage Association sells mortgage-backed securities backed by fixed-rate mortgages with the MBS having the following features: Current mortgage balance = $300,000,000 . Weighted average coupon rate (WAC) = 6% Weighted average maturity (WAM) = 360 months Current prepayment speed = 300 PSA Pass-through rate = PT Rate = 5.4% %3D (1) What is the amount of prepayment for month 1? (2) What is the amount of total cash flows for month 1? Homework 6: Due 12/9 (Please write your answers legibly) 1. If Congress changes the tax law to increase marginal income tax rates, what will happen to the price of municipal bonds? Why? We assume that other factors are constant. 2. What is the muni yield ratio, and why is it expected to be less than 1? 3. You plan to buy a $500,000 house using a 30-year fixed-rate mortgage obtained from your local bank. The mortgage rate offered to you is 6%. You will make a down payment of 20% of the purchase price ($500,000). (1) Calculate your monthly payments on this mortgage. (2) Construct an amortization schedule for the first 2 months. In other words, calculate the amount of interest and scheduled principal payment for the first 2 months. Follow the example posted on Moodle. (3) Calculate the amount of interest paid over the life of this mortgage. 4. Solve the following problems about mortgage-backed securities. Suppose Federal National Mortgage Association sells mortgage-backed securities backed by fixed-rate mortgages with the MBS having the following features: Current mortgage balance = $300,000,000 . Weighted average coupon rate (WAC) = 6% Weighted average maturity (WAM) = 360 months Current prepayment speed = 300 PSA Pass-through rate = PT Rate = 5.4% %3D (1) What is the amount of prepayment for month 1? (2) What is the amount of total cash flows for month 1
