Debt, FI853 Money Instruments & Markets
Assignment #5 (Nov. 28th 2006)
Cho, Gyu Ho
FIN853: Fall 2006 Assignment #5 Chapter 10-21 F0 [r(1+r)n]/[(1+r)n1] To solve this problem, we can use a calculator: N 360 I/Y 0.6667( 8%/12) PV 150000 FV 0 CPT PMT Then, PMT=$1,100.6469/momth Chapter 11-15. Month Out. SMM Mort. Interest Bal. Pay. 1 100,000 0.000275 841 750 2 99,881 0.000552 841 749.51 For calculation each cell, M1.CPR = 6% 1/30 = 0.002 165 PSA = 1.65(0.002) = 0.0033 M2.CPR = 6% 2/30 = 0.004 165 PSA = 1.65(0.004) = 0.0066 M 1. SMM = 1(1CPR)1/12 = 1(10.0033)1/12 = 0.000275 M 2.SMM = 1(1CPR)1/12 = 1(10.0066)1/12 = 0.000552 M 1. Interest = 100,000 0.09/12 = 750 M 2. Interest = 99,934 0.09/12 = 749.51 M 1. Scheduled Principal = 841100,000 0.09/12 = 91 M 2. Scheduled Principal = 84199,934 0.09/12 = 91.50 M 1. Prepayment = 0.000275 (100,000 91) = 27.47 M 2. Prepayment = 0.000552 (99,934 91.50) = 55.11 M 1. Total Principal = 91 + 27.47 = 118.47 M 2. Total Principal = 91.50 + 55.11 = 146.61 M 1. Total CF = 750 + 118.47 = 868.47 Sch. Prin. 91 91.50 PreTot. Total Pay. Prin. CF 27.47 118.47 868.47 55.11 146.61 896.12
M 2. Total CF = 749.51 + 146.61 = 896.12 Chapter 12 12-4.When there is more than one classes of bondholders with the same level of credit priority, the structure is called a pay-through structure, as opposed to a pass-through structure in which there is one class of bondholders at a given level of credit priority. 12-5.Sequential-pay CMOs including a accrual tranche have different average lives for tranches. The expected final maturity for nonaccrual tranches shortens as a result of the inclusion of an accrual tranche because the interest paid to the accrual tranche is allocated to the other tranches. 12-6.Since there are no coupon payments to reinvest and reinvestment risk is eliminated until all the other tranches paid are off, the accrual bond itself may appeal to investors who are concerned with reinvestment risk 12-12.If the savings and loan association needs a high degree of cash flow certainty, a PAC tranche of a Freddie Mac CMO issue with an average life of two years would be better. In general, PAC bondholders have priority over all other classes in the CMO issue in receiving principal payments from the underlying collateral. 12-14.a.The support bond will have the greatest average life variability. It has characteristics as follows; Support bond foregoes principal payment if the collateral prepayment is slow; it does not receive any principal until the PAC bond receives the scheduled principal repayment. It absorbs any principal payments in excess of the scheduled principal payment that are made. 12-14.b.The PAC bond will have the least average life variability. The reason is that PAC bond has a specified schedule of prepayment, prepayment risk is reduced by support bond. Even if the prepayment is faster than the initial upper collar, there may be sufficient support bond to assure the satisfaction of the schedule. 12-27. PO is a principal-only security where as IO is an interest-only security. For PO, it means that MBS which pay only the principal component of mortgage pool cash flows. For IO, it means that MBS which pay only the interest component of mortgage pool cash flows. 12-27.b.If mortgage rates decline below the coupon rate, prepayments will be increased which results in a deterioration of the expected cash flow for an IO. Although the cash flow will be discounted at a lower rate, the net effect is a decline in the price of an IO. If mortgage rates rise above the coupon rate, the
expected cash flow improves but the cash flow is discounted at a higher rate. The net effect may be a either a rise or a fall for the IO.