Additionally, please answer the following questions about CMOs. For questions 8-11, assume there exists a tranche of a CMO with a total principle value of $80,000,000. This tranche is divided into $60,000,000 of floaters and $20,000,000 of inverse floaters. The pool is at a fixed rate of 8%. 8) If the floaters' coupon is set at LIBOR, how is the coupon set on the inverse floaters? 10. How does the duration of the inverse floater compare with the duration of an 8% fixed rate note of comparable maturity to the mortgage pool? 11) If the duration of the underlying mortgage pool is 6 years and an investor were to lever up their position in the inverse floater by 2.5 - to-1, what would be the duration of their position?
Additionally, please answer the following questions about CMOs. For questions 8-11, assume there exists a tranche of a CMO with a total principle value of $80,000,000. This tranche is divided into $60,000,000 of floaters and $20,000,000 of inverse floaters. The pool is at a fixed rate of 8%. 8) If the floaters' coupon is set at LIBOR, how is the coupon set on the inverse floaters? 10. How does the duration of the inverse floater compare with the duration of an 8% fixed rate note of comparable maturity to the mortgage pool? 11) If the duration of the underlying mortgage pool is 6 years and an investor were to lever up their position in the inverse floater by 2.5 - to-1, what would be the duration of their position?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Additionally, please answer the following questions about CMOs. For questions 8-11, assume there exists a tranche of a CMO with a total principle value of $80,000,000. This tranche is divided into $60,000,000 of floaters and $20,000,000 of inverse floaters. The pool is at a fixed rate of 8%. 8) If the floaters’ coupon is set at LIBOR, how is the coupon set on the inverse floaters? 10. How does the duration of the inverse floater compare with the durat ion of an 8% fixed rate note of comparable maturity to the mortgage pool? 11) If the duration of the underlying mortgage pool is 6 years and an investor were to lever up their position in the inverse floater by 2.5-to-1, what would be the duration of their position?
Transcribed Image Text:Additionally, please answer the following questions about CMOs. For questions 8-11, assume there exists a tranche of a CMO with a total principle value of $80,000,000. This tranche is divided
into $60,000,000 of floaters and $20,000,000 of inverse floaters. The pool is at a fixed rate of 8%. 8) If the floaters' coupon is set at LIBOR, how is the coupon set on the inverse floaters? 10. How
does the duration of the inverse floater compare with the duration of an 8% fixed rate note of comparable maturity to the mortgage pool? 11) If the duration of the underlying mortgage pool is 6
years and an investor were to lever up their position in the inverse floater by 2.5 - to-1, what would be the duration of their position?
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