Question
Third Mortgage Investors makes money by purchasing mortgage backed securities (MBS), stripping them into interest only (IO) and principal only (PO) components, and selling the
Third Mortgage Investors makes money by purchasing mortgage backed securities (MBS), stripping them into interest only (IO) and principal only (PO) components, and selling the components for more than it paid for the original security. Suppose the company purchases a $100,000 Face value MBS carrying a coupon of 9 percent and a maturity of 30 years. Assume for the purpose of the following analysis, the MBS will make payments on an ANNUAL BASIS.
| Years Survived | Yield (%) |
| 1 | 6.00 |
| 3 | 7.00 |
| 5 | 8.00 |
| 8 | 9.00 |
What is the total cash flow received by the purchasers of the IO strip, and the PO strip if the MBS survives 1 year? 3 years? 30 years?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started
Fundamentals of Financial Management
Authors: Eugene F. Brigham, Joel F. Houston
Concise 6th Edition
324664559, 978-0324664553
