Q3: MBS

There are two parts in this question, you are expected to answer all of them. Part (a). Complete the following table assuming a prepayment rate of 140 PSA: (3 marks) Original balance: $150,000,000 Pass-through rate: 7% WAM: 360 months interest Cash flow month outstanding balance SMM mortgage payment scheduled principal repayment Pre- Total payment principal repayment 1 $150,000,000 0.023% $1,316,357.36 $875,000 $441,357.36 $34,941.88 $476,299.24 $1,351,299.24 2 $148,648,700.76 0.047% $1.316,357.36 $867,117.42 $449,239.93 $69,337.90 $518,577.83 $1,385,695.25 $1,316,357.36 $457,323.16 2 3 Note: you don't have to replicated the entire table in your answer. Showing the workings and values of all missing items of Month 3 suffices Part (b). Suppose you own a mortgage pass through security as described in Part (a). Describe the influence of a decrease in mortgage rates on the total Part (a). Complete the following table assuming a prepayment rate of 140 PSA: (3 marks) Original balance: $150,000,000 Pass through rate: 7% WAM: 360 months interest month outstanding balance Cash flow SMM mortgage payment scheduled principal repayment Pre- payment Total principal repayment 1 $150,000,000 0.023% $1,316,357.36 $875,000 $441,357.36 $34.941.88 $476,299.24 $1,351,299.24 2 $148,648,700.76 0.047% $1.316,357.36 $867,117.42 $449.239.93 $69,337.90 $518,577.83 $1,385,695.25 2 ? ? 3 $1.316,357.36 $457,323.16 Note: you don't have to replicated the entire table in your answer. Showing the workings and values of all missing items of Month 3 suffices. Part (b). Suppose you own a mortgage pass-through security as described in Part (a). Describe the influence of a decrease in mortgage rates on the total return of the mortgage backed security as compared to an otherwise identical plain vanilla bond. (2 marks) a There are two parts in this question, you are expected to answer all of them. Part (a). Complete the following table assuming a prepayment rate of 140 PSA: (3 marks) Original balance: $150,000,000 Pass-through rate: 7% WAM: 360 months interest Cash flow month outstanding balance SMM mortgage payment scheduled principal repayment Pre- Total payment principal repayment 1 $150,000,000 0.023% $1,316,357.36 $875,000 $441,357.36 $34,941.88 $476,299.24 $1,351,299.24 2 $148,648,700.76 0.047% $1.316,357.36 $867,117.42 $449,239.93 $69,337.90 $518,577.83 $1,385,695.25 $1,316,357.36 $457,323.16 2 3 Note: you don't have to replicated the entire table in your answer. Showing the workings and values of all missing items of Month 3 suffices Part (b). Suppose you own a mortgage pass through security as described in Part (a). Describe the influence of a decrease in mortgage rates on the total Part (a). Complete the following table assuming a prepayment rate of 140 PSA: (3 marks) Original balance: $150,000,000 Pass through rate: 7% WAM: 360 months interest month outstanding balance Cash flow SMM mortgage payment scheduled principal repayment Pre- payment Total principal repayment 1 $150,000,000 0.023% $1,316,357.36 $875,000 $441,357.36 $34.941.88 $476,299.24 $1,351,299.24 2 $148,648,700.76 0.047% $1.316,357.36 $867,117.42 $449.239.93 $69,337.90 $518,577.83 $1,385,695.25 2 ? ? 3 $1.316,357.36 $457,323.16 Note: you don't have to replicated the entire table in your answer. Showing the workings and values of all missing items of Month 3 suffices. Part (b). Suppose you own a mortgage pass-through security as described in Part (a). Describe the influence of a decrease in mortgage rates on the total return of the mortgage backed security as compared to an otherwise identical plain vanilla bond. (2 marks) a