Question

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-througe 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 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

Answer 1

Given : Aggregate Par Value Weighted average coupon rate Passthrough Rate 500 Million $ 8.10% 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 = Interet payment for first month = Aggregate par value X Passthrough rate 12 36 12 3 Million $ Interet payment for first month = Hence, payment during the first month shall be 3 Million $ as per the payment rule