Problem 4 [10 points]

ABC Bank originates a pool of containing 100 15-year fixed-rate mortgages with loan amount of $100,000 each. All mortgages in the pool carry a rate of 6% with annual payments. Suppose that the servicing fee is 0.5%. ABC Bank would like to sell the pool to investors via Mortgage Pass Through (MPT) security. Suppose that 100,000 shares will be issued and the market interest rate is 5.5%

Questions

1. Assume that there are no prepayment and no default, how much an investor would like to pay for each share of the MPT security?

2. What is the price of each share of the MPT if there are a constant annual prepayment rate of 10% and no default?