Question
You report for work as a financial analyst at Tory's Pun and Mortgage Loans (TPML), and you're immediately called to a room behind the bar
You report for work as a financial analyst at Tory's Pun and Mortgage Loans (TPML), and you're immediately called to a room behind the bar for a consultation with John, the sole owner of this establishment. John fancies himself to be a savy investor, but knows only enough mortgage finance to be dangerous to himself and others. After reading the business pages in yesterday's Toronto Sun, John has become concerned with the risk that recent interest rate volatility poses to the solvency of his operation. The assets in TPML's corporate portfolio consist of ten identical constant payment mortgages. Each mortgage has a twenty year maturity, full amortization, a fixed annual coupon rate of 5.00% over its twenty year maturity and an initial balance of $1,000,000.00. John directs you to calculate the change in the value of this portfolio for respective one percent increases and decreases in the current monthly interest rate of six percent, on the assumption that this one month interest rate remains constant over all one-month periods in the futures. You proceed with this analysis, using the duration procedure, and find the TPML asset portfolio to be 6.
A) Under John's scenario what are the respective values of this mortgage portfolio for the specified interest rate increase and decrease?
B) After reporting the results of your analysis to John, he admits that he financed these ten mortgages by persuading his father-in-law to give him a personal loan of $9.600,000.00 with a maturity of twelve months from today. and he furthers tells you that the duration of this liability is .1. What do you tell him about his equity value in TPML for these same respective interest rate changes?
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