In each of the following questions monthly mortgage coupon rates should be

calculated by simply dividing the annual rate by 12. You should also assume that all of the

securities pay monthly. You should also divide annual interest rates by 12 to get the corresponding monthly rate and assume monthly compounding when computing present values. (Principal-Only MBS and Interest-Only MBS) Suppose we construct principal-only (PO) and interest-only (IO) mortgage-backed securities (MBS) using the mortgage pass-through of the previous questions. Assume a prepayment multiplier of 100 PSA. What is the present value of the PO MBS if we use an annual risk-free rate of 4.5% to value the cash-flows?

Hint: Please note that prepayment is permitted.

Question 6

(Principal-Only MBS and Interest-Only MBS) Referring to the previous question, what is the value of the IO MBS?

plz answer as much as you can

7.

Question 7

(Principal-Only MBS and Interest-Only MBS) Referring to the previous question, what is the average life of the IO MBS?

Submission Guideline: Give your answer in years rounded to two decimal places. For example, if you compute the answer to be 12.1234 years, submit 12.12.

1 point

8.

Question 8

Quiz Instructions

(Principal-Only MBS and Interest-Only MBS) Suppose now that you purchased the IO MBS of the previous question and that the price you paid was the same price that you calculated in the previous question. The risk-free interest rate suddenly changes from 4.5% to 3.5%. Everything else stays the same. How much money have you made or lost on your investment?

9.

Question 9

(Principal-Only MBS and Interest-Only MBS) Referring to the previous question, suppose the risk-free interest rate suddenly changes from 4.5% to 3.5% and that the pre-payment multiplier changes from 100 PSA to 150 PSA. How much money have you made or lost on your investment in the IO MBS?