I am having problems with these few (6) questions, I have also attached my notes and the excel sheet for question 4

1.Given a floater/inverse floater tranche with a total principal amount of $25,000,000, 7% interest, and even allotments to the floater class and the inverse floater classes what is the maximum interest rate cap on the floater class? (State your answer as a percentage as follows: if your answer was two percent, enter2.00)

2.A floater/inverse floater is created on $30,000,000of principal from a pool of 8%FRMs(assume payments are made annually).Half is allotted to the floater class and half to the inverse floater.If the market rate decreases by 2.5% in the next period, what will be the cash flow to the inverse floater?

3.Given a floater/inverse floater class with $10,000,000 principal and even allotments to the floater and inverse floater class , and a pool of 4%FRMswith annual payments, what is the payment to the floater class if the index rate increases to 9% in the next period?

4.$10,000,000of a7%10yearFRM pool making annual payments is allocated to a PO/IO class.Atapproximatelywhat level of prepayment will the IRR of IO class be0?(Use the excel sheet/graph,round to the nearest percentage.For example,if your answer is two percent,enter2)

5.If you have a 4 year bond making annual payments with a coupon rate of 10% and a market/discount rate of 9.5%, what is the estimated price change if the market rate increases to 9.8%? Round to 2 decimal places.(Hint:calculate modified duration. If your answer is a half percent price increase enter 0.50)

6.Given a $7,500,000pool of 10 yearFRMsmaking annual payments with a 10% interest rate a PO and IO class of securities is formed. What is the present value of the PO class if the market rate is 11%?

Floater and Inverse Floater Input Assumptions Total amount of tranche Interest rate for tranche Total interest available Floater (F) Inverse floater (IF) Total Libor 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% $20,000,000 6.00% $1,200,000 Amount Interest rate TERM Maximum Rate change Rate limit 0.50 6.00% 12.00% 0.50 -6.00% 0.00% 1.00 $ Amount Scale $10,000,000 10,000,000 20,000,000 F / IF Ratio Max Inverse Floater (IF IO/PO Annual Payment (IF) Rate 12.00% 11.00% 10.00% 9.00% 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% F Interest $0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 900,000 1,000,000 1,100,000 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000 IF Interest $1,200,000 1,100,000 1,000,000 900,000 800,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000 0 0 0 0 0 0 0 647522.87483 Prepayment 0.00% LOAN SCHEDULE FOR MORTGAGE POOL Year 1.00 12.00% (F) Rate 0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 8.00% 9.00% 10.00% 11.00% 12.00% 12.00% 12.00% 12.00% 12.00% 12.00% 12.00% MORTGAGE POOL $5,000,000 5.00% 10 years Beg. Bal 1 2 3 4 5 6 7 8 9 10 Total Interest $1,200,000 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000 5000000 4602477 4185078 3746809 3286627 2803435 2296084 1763365 1204011 616688 Payment Interest 647523 647523 647523 647523 647523 647523 647523 647523 647523 647523 Principal 250000 230124 209254 187340 164331 140172 114804 88168 60201 30834 397523 417399 438269 460182 483192 507351 532719 559355 587322 616688 End Bal 4602477 4185078 3746809 3286627 2803435 2296084 1763365 1204011 616688 0 Prepayment 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Interest only and Principal only strips Year Interest 1 2 3 4 5 6 7 8 9 10 Principal $250,000 230,124 209,254 187,340 164,331 140,172 114,804 88,168 60,201 30,834 $397,523 417,399 438,269 460,182 483,192 507,351 532,719 559,355 587,322 616,688 Assuming no prepayment PV @ 11% $988,823 PV @ 11% $2,824,589 Total PV $3,813,412 Assuming no prepayment PV @ 10% $1,021,252 PV @ 10% $2,957,496 Total PV $3,978,748 Assuming no prepayment PV @12% $958,108 PV @12% $2,700,541 Total PV $3,658,649 Rate on Floater and Inverse Floater vs. LIBOR 14.00% 12.00% 10.00% Assuming prepayment: 8.00% Rate AMOUNT INTEREST RATE TERM 6.00% MORTGAGE POOL $5,000,000 ($000 omitted) 5.00% 10 years 4.00% ANNUAL PAYMENT 2.00% 0.00% 0% 647522.87483 PREPAYMENT 20.00% (Refer to for data table below) LOAN SCHEDULE FOR MORTGAGE POOL 1% 2% 3% 4% 5% 6% 7% 8% 9% LIBOR 10% 11% 12% 13% 14% 15% 16% 17% 18% Year Beg. Bal 1 2 5000000 3602477 Payment 647523 506833 Interest 250000 180124 Principal 1397523 1047204 End Bal 3602477 2555273 Prepayment 1000000 720495 Floater Inverse Floater 3 4 5 6 7 8 9 10 2555273 1776625 1203096 785600 486306 276216 133355 41633 395356 307036 237031 181454 137144 101429 71719 43714 127764 88831 60155 39280 24315 13811 6668 2082 778647 573530 417495 299294 210090 142861 91722 41633 1776625 1203096 785600 486306 276216 133355 41633 0 511055 355325 240619 157120 97261 55243 26671 0 Interest only and Principal only strips Year Interest 1 2 3 4 5 6 7 8 9 10 Principal $250,000 180,124 127,764 88,831 60,155 39,280 24,315 13,811 6,668 2,082 $1,397,523 1,047,204 778,647 573,530 417,495 299,294 210,090 142,861 91,722 41,633 PV @ 11% $601,097 PV @ 11% $3,677,586 Total PV $4,278,683 Extra Calculations below Present values at 8 percent with 20.00% prepayment PV of interest PV of Principal $601,097 $3,677,586 Total PV $4,278,683 PV of Interest PV of Principal Total PV Prepayment 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% $3,813,412 $3,967,032 $4,091,946 $4,194,244 $4,278,683 $4,348,973 $4,407,998 Assume price paid for the IO the PO based on 15% prepayment. What is the IRR for the IO and PO if prepayment is actually 20%? Year 0 1 2 3 4 5 6 7 8 9 10 IRR Interest ($671,463) 250,000 180,124 127,764 88,831 60,155 39,280 24,315 13,811 6,668 2,082 Principal ($3,522,781) 1,397,523 1,047,204 778,647 573,530 417,495 299,294 210,090 142,861 91,722 41,633 6.29% 12.78% IRR of IO Prepayment IRR of PO 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% IRR on IO and PO vs. Prepayment 1200% IO 1000% PO 800% IRR 600% 400% 200% 0% 0.00% 5.00% 10.00% 15.00% Prepayment rate 20.00% 25.00% 30.00%