The Green Mortgage Company has originated a pool containing 75 ten-year fixed interest rate mortgages with an average balance of $102,400 each. All mortgages in the pool carry a coupon of 12 percent. ( For simplicity, assume that all mortgage payments are made annually at 12% interest.) Green would now like to sell the pool to FNMA. Required: a. Assuming a constant annual prepayment rate of 10 percent (for simplicity, assume that prepayments are based on the pool balance at the end of each year), what will be the price that Green should obtain on the date of issuance if market interest rates were (1) 11 percent? (2) 12 percent? (3) 9 percent? b. Assume that five years have passed since the date in (a). What will the pool factor be? If market interest rates are 12 percent, what price can Green obtain then? c. Instead of selling the pool of mortgages in (a), Green decides to securitize the mortgages by issuing 100 pass-through securities. The coupon rate will be 11.5 percent and the servicing and guarantee fee will be 0.5 percent. However, the current market rate of return is now 9.5 percent. How much will Green obtain for this offering of MPTS? What will each purchaser pay for an MPT security, assuming the same prepayment rate as in (a)? d. Assume now that immediately after purchase in (c), interest rates fall to 8 percent and that the prepayment rates are expected to accelerate to 20 percent per year, beginning at the end of the first year. What will the MPT security be worth now?
The Green Mortgage Company has originated a pool containing 75 ten-year fixed interest rate mortgages with an average balance of $102,400 each. All mortgages in the pool carry a coupon of 12 percent. ( For simplicity, assume that all mortgage payments are made annually at 12% interest.) Green would now like to sell the pool to FNMA. Required: a. Assuming a constant annual prepayment rate of 10 percent (for simplicity, assume that prepayments are based on the pool balance at the end of each year), what will be the price that Green should obtain on the date of issuance if market interest rates were (1) 11 percent? (2) 12 percent? (3) 9 percent? b. Assume that five years have passed since the date in (a). What will the pool factor be? If market interest rates are 12 percent, what price can Green obtain then? c. Instead of selling the pool of mortgages in (a), Green decides to securitize the mortgages by issuing 100 pass-through securities. The coupon rate will be 11.5 percent and the servicing and guarantee fee will be 0.5 percent. However, the current market rate of return is now 9.5 percent. How much will Green obtain for this offering of MPTS? What will each purchaser pay for an MPT security, assuming the same prepayment rate as in (a)? d. Assume now that immediately after purchase in (c), interest rates fall to 8 percent and that the prepayment rates are expected to accelerate to 20 percent per year, beginning at the end of the first year. What will the MPT security be worth now?
Chapter5: The Time Value Of Money
Section: Chapter Questions
Problem 41P
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Transcribed Image Text:The Green Mortgage Company has originated a pool
containing 75 ten-year fixed interest rate mortgages
with an average balance of $102,400 each. All
mortgages in the pool carry a coupon of 12 percent. (
For simplicity, assume that all mortgage payments are
made annually at 12% interest.) Green would now like
to sell the pool to FNMA. Required: a. Assuming a
constant annual prepayment rate of 10 percent (for
simplicity, assume that prepayments are based on the
pool balance at the end of each year), what will be the
price that Green should obtain on the date of issuance if
market interest rates were (1) 11 percent? (2) 12
percent? (3) 9 percent? b. Assume that five years have
passed since the date in (a). What will the pool factor
be? If market interest rates are 12 percent, what price
can Green obtain then? c. Instead of selling the pool of
mortgages in (a), Green decides to securitize the
mortgages by issuing 100 pass-through securities.
The coupon rate will be 11.5 percent and the servicing
and guarantee fee will be 0.5 percent. However, the
current market rate of return is now 9.5 percent. How
much will Green obtain for this offering of MPTS? What
will each purchaser pay for an MPT security, assuming
the same prepayment rate as in (a)? d. Assume now
that immediately after purchase in (c), interest rates fall
to 8 percent and that the prepayment rates are
expected to accelerate to 20 percent per year,
beginning at the end of the first year. What will the MPT
security be worth now?
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