Question

In each of the following questions monthly mortgage coupon rates should be calculated by simply dividing the annual rate by 12. You should also assume that all of the

securities pay monthly. You should also divide annual interest rates by 12 to get the corresponding monthly rate and assume monthly compounding when computing present values.

1. (Mortgage Pass-Throughs) Consider a $400 million pass-through MBS that has just been created (so the 'seasoning' of the pass-through is equal to 0). The underlying pool of mortgages each has a maturity of 20 years and an annual mortgage coupon rate of 6%. The pass-through rate of the mortgage pool is 5%. what is the total amount of the prepayments if the rate of prepayments increases to 200 PSA? Submission Guideline: Give your answer in millions rounded to two decimal places. For example, if you compute the answer to be $123,456,789,12, submit 123.46.

Answer 1

Answer:

$4,00,000

Step By Step Explaation:

Step 1: Calculation of prepayment per month

Prepayments per month =

= Initial Pricipal × (Annual mortgage coupon rate / 12)

= $400000 x (0.06/12)

=$2000

Step 2: Total amount of the prepayments

Total amount of the prepayments if the rate of prepayments increases to 200 PSA

= 200 × $2,000

= $4,00,000