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Unformatted text preview: Monthly payment Principal r (1 r ) m (1 r ) m 1 $300,000 0.085 12 1 0.085 12 360 1 0.085 12 360 1 $2,306.74 Question and Problem Answers page 1 Chapter 20 - Asset Backed Securities ¡ 20 - 1: A. The monthly mortgage payment is $2,306.74 B. On the first payment $2,125.00 is interest and the remainder, $181.74, is principal. $300,000 0.085 12 C. The first payment reduces or pays down the principal by $181.74. This means you still owe $299,818.26 on your mortgage. The second payment will thus include interest of $2123.71 and $183.03 principal. $299,818.26 0.085 12 ¡ 20 - 2: If the current mortgage rates are lower than 7.3% (6.8% + 0.5%) then the dealer wants to keep the securities with the lowest probability of prepayment because these mortgages generate a higher than current rate of interest. 250% PSA means that, even when mortgage rates remain steady, this pool will prepay faster than the PSA benchmark pool (perhaps the mortgages are all in Champaign-Urbana where, due to the University, mobility is high). By slipping your colleague the highest %PSAare all in Champaign-Urbana where, due to the University, mobility is high)....
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- Spring '07
- Financial Markets, Mortgage loan, prepayment rate