Question

QWE R FINC 6620 Homework on ABS Assume that a pool of mortgages with aggregate par value of $500 million is used as collateral for an asset backed security. The weighted average coupon on the mortgages is 8.1% and the pass-through coupon rate is 7.2%. a) Calculate the interest payments during the first month. Assume the MBS is packaged into the following sequential-pay tranches. Tranche А Par, $ millions 150 140 110 100 Payment Rule Monthly coupon payment is made in proportion to beginning principal balance. Principal payments should be made first to A, then B, then C and finally D tranches. b) Assume in addition to the interest payment you calculated in (a) above, scheduled principal payment of $20 million and additional principal prepayment of $15 million is made during the month. Prepare a schedule to show all the disbursements to the four tranches. c) Assume immediately after the disbursements above, there are defaults in the mortgages and the pool repossessed and sold the underlying properties to realize a net cash flow of $250 million. How should that be distributed to the tranches?

Answer 1

Given: 500 Million $ Aggregate Par Value Weighted average coupon rate 8.10% Passthrough Rate 7.20% Solution: We know that, MBS (Market backed security) are the bank mortgage marketable security which are actively traded on exchange. These security may be combination of two or more mortgage. Hence, a weighted average coupon rate is calculated to calculate average interest to be paid on mortgage to investor. Passthrough rate is the rate at which payment is made to investors, where various fees such as management fees, etc is deducted from the weighted coupon rate payable to investor. Hence, the amount paid to investor is at passthrough rate Interet payment for first month Aggregate par value X Passthrough rate 12 Interet payment for first month 36 12 Million $ Interet payment for first month Hence, payment during the first month shall be 3 Million $ as per the payment rule *Note: We are allowed to answer only one question