Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Suppose we have a new type of MBS to accommodate the short-term investor. This new MBS security instrument contains only 5-year mortgages (in reality are

Suppose we have a new type of MBS to accommodate the short-term investor. This new MBS security instrument contains only 5-year mortgages (in reality are rare if non-existent). ACME, a private secondary mortgage market, has pooled together ten $100,000 5-year mortgage loans. Note: To save space in writing out your work, you can scale the ten $100,000 to $100. Calculate the duration for this MBS pool assuming annual compounding for three years at 10 percent interest which

a. is a zero coupon.

b. is an interest-only MBS.

c. is fully amortizable over the five years.

Now assume that the interest-only MBS in problem 2b. is prepayable (but not defaultable). Use the option-theoretic model to price this MBS. Interest rates have a 50% chance of going up 1% each year and a 50% chance of going down 1% each year. From your results, qualitatively compare the MBS value without prepayment to the MBS value with prepayment. Note: To save space in writing out your work, you can scale the ten $100,000 to $100. in your solution show the work

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

Audits Of 401k Plans

Authors: Deloitte And Touche

2nd Edition

1119722039, 978-1119722038

More Books

Students also viewed these Accounting questions