Use the following information on a convertible bond issue from for Problems 6 10. You are examining a mortgage backed security with the following features:$500 million in underlying mortgages (e.g., principal value = $500 million)Threetime tranches, A,B,and Cwhere the par value of A is $200 million, the par value of B is $100 million, and the parvalue of C is $200 million. A is senior to B and B is senior to C.The weighted average coupon (WAC) is 6%; the pass through rate is 5%The security has a weighted average maturity (WAM) of 3 years and payments are made annually(e.g., so it will only make 3 payments). For Questions 6-7, assume that there is no default and no prepayment.

Total MBS Issue:YearBeg. BalancePaymentInterest PaidPrincipal PaidEnd. Balance12X3Tranche A:YearBeg. BalanceInterest PaidPrincipal PaidEnd. BalanceTotal Cash Flow123

Tranche B:YearBeg. BalanceInterest PaidPrincipal PaidEnd. BalanceTotal Cash Flow123Tranche C:YearBeg. BalanceInterest PaidPrincipal PaidEnd. BalanceTotal Cash Flow12Y36.What is the value of X? 7.What is the value of Y?8.Suppose now that not only were these tranches based on time (e.g., A gets repaid in full before B begins receiving payment) but they are also based on credit (e.g., Cabsorbs all losses before Aor Bloses a penny). Suppose that investors default on $75 millionin loansimmediately after the payments in year 1. Redo the tables and obtain the value of Y. 9.Supposethe rate ofprepayment increases. Does durationof this MBSincreaseor decrease? Explain your answerin 1-2 sentences. 10.Suppose interest rates decrease. What would you expect to happen to the duration of this MBS? Would it increaseor decrease? Explain your answer in 1-2 sentences.

Page of 3 ZOOM + --------- The security has a weighted average maturity (WAM) of 3 years and payments are made annually (e.g., so it will only make 3 payments). For Questions 6-7, assume that there is no default and no prepayment. Total MBS Issue: Year Beg. Balance Payment Interest Paid Principal Paid End. Balance 1 2 x 3 Tranche A: Year eg. Balance Interest Paid Principal Paid End. Balance Total Cash Flow 1 2 3 Page of 3 ZOOM + --------- The security has a weighted average maturity (WAM) of 3 years and payments are made annually (e.g., so it will only make 3 payments). For Questions 6-7, assume that there is no default and no prepayment. Total MBS Issue: Year Beg. Balance Payment Interest Paid Principal Paid End. Balance 1 2 x 3 Tranche A: Year eg. Balance Interest Paid Principal Paid End. Balance Total Cash Flow 1 2 3