PART 1: MORTGAGES \& COLLATERAL 1a) What would be the (constant) monthly repayment on a 10yr mortgage loan of $1mn if the interest rate charged is 3% ? Hint: the interest rate is annualised so divide it by 12 to get the required answer 1b) After two years (at the end of month 24) and assuming no change in interest rates what price could the bank sell this mortgage loan for in a securitisation exercise? 1c) Assuming that the mortgage rate is still 3% what is the maximum 10yr loan (to the nearest $10k ) that should be bffered to a family that cannot afford a monthly repayment of more than $3800 ? Say a jumbo mortgage loan is offered with a $2.0mn property acting as collateral and with a 10% haircut applied. Assume the mortgage loan is non-recourse and that the borrower will hand back the keys, fully defaulting, if the property value falls below the mortgage taken. The bank's risk department says that, at the time the loan is granted, there is a 5% chance that house prices could drop by 20% (and a 95% chance that the $2mn valuation will hold and the borrower does not default). Hint: the term "expected payoff" is covered in the CS textbook ch5 1d) What is the bank's expected $ payoff from this mortgage deal? 1e) How much capital is at risk in the worst-case scenario (expected versus worst-case payoff)