Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

If, in today's respective markets for one-month, three-month and six-month mortgage coupon payments, trading determines a market price of ninety and one-half (99.5$) dollars per

If, in today's respective markets for one-month, three-month and six-month mortgage coupon payments, trading determines a market price of ninety and one-half (99.5$) dollars per one hundred dollars of coupon payment receivable in one month, ninety0eight and one-fourth (98.25$) dollars today per one hundred dollars(100.00$) of coupon payment receivable in three months, and ninety-seven and one-fourth (97.25$) dollars per hundred dollars ($100.00) of coupon payment receivable in six months

Consider again these same three markets with today's market values of their respective prices. A mortgage lender has just originated a twenty year, interest-only Canadian mortgage with a balance of $500,000.00 and an announced annual mortgage coupon rate, , of 6%.He offers to sell either you or your classmate, today, a security composed of a single three-month coupon plus a single six-month coupon, each of which could be traded on an individual basis in these markets. (Restating this for clarity, the security consists of one one-month coupon and one three-month coupon)

a. What should you offer to pay for this security today? b. What would your classmate offer to pay for this same security if he used the announced annual coupon rate of 6% to calculate its present discounted value? c. To whom would the lender sell the security? d. If your classmate buys the security at the price he calculates for its present discounted value, how much does he gain or lose (in dollars today) relative to what he would have paid by using the market prices in the three coupon markets above? e. Since you can trade in today's markets for one-month and three-month coupons, you decide you can make an arbitrage profit from your classmate's purchase by offering to trade each of the one-month and three-month coupon payments composing the security he now owns. Assuming you and he limit your trading to just one coupon of each maturity, determine (i) how much of a profit you could make and (ii) whether you buy or sell the one-month coupon you trade with him and, analogously, whether you buy or sell the three-month coupon you trade with him

Thank you !

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Intermediate Financial Management

Authors: Eugene F Brigham, Phillip R Daves

14th Edition

0357516664, 978-0357516669

More Books

Students also viewed these Finance questions

Question

3. What would you do now if you were Mel Fisher?

Answered: 1 week ago

Question

14.3 Explain WHMISlegislation.

Answered: 1 week ago