Question

# 1. Assume that a loan has a beginning balance of $600,000, a 30-year (360 month)

term, an interest rate of 5.5%. The monthly payment is:

a. $3,204.33

b. $3,406.73

c. $33,000.00

d. $21,452.23

2. Assume that a loan has a beginning balance of $500,000, a 30-year (360 month) term, an interest rate of 5.5%. The principal paid in the first month is:

a. $1,793.75

b. $547.28

c. $2,291.67

d. $2,021.56

3. Answer "shorten" or "lengthen" to the following question.

If a homeowner makes extra payments on her mortgage, it will ___________ the life of the mortgage.

4. Assume that an investor purchases a principal-only security and that market interest rates drop sharply after purchase. The value of the security will:

a. Decrease because the prepayment effect will outweigh the discount effect

b. Increase because the prepayment effect and discount effect will move in the same direction

c. Increase because the discount effect will outweigh the prepayment effect

d. The price direction cannot be determined because the discount and prepayment effects will move in different directions.

5. True or False: In general, if credit risk is not a concern, a principal only strip is less risky than an interest only strip.

6. Assume a mortgage-backed security has a $10,000,000 balance and 180 months to maturity (WAM). The WAC is 6.5% and the pass-through rate is 6.35%. Assume that PSA is 0. Calculate the servicing fee for the first month.

a. $4,166.67

b. $52,916.67

c. $1,250

d. $9,040.14

7. Assume a mortgage-backed security has a $10,000,000 balance and an initial maturity of 180 months (WAM). The remaining time to maturity is 160 months. The WAC is 6.5% and the pass-through rate is 6.35%. Assume that PSA is 250. Calculate the prepayment for the next period.

a. $1,250.00

b. $91,654.08

c. $39,439.54

d. $52,916.67

8. Assume a mortgage-backed security has a $10,000,000 balance and an initial maturity of 180 months (WAM). The remaining time to maturity is 160 months. The WAC is 6.5% and the pass-through rate is 6.35%. Assume that PSA is 150. Calculate the CPR for the next period.

a. 0.060

b. 0.003

c. 0.063

d. 0.066

9. Assume that a loan has the following expected principal payment schedule:

Time

Principal

1 year

$500

2 years

$300

3 years

$1000

4 years

$200

5 years

$600

Calculate the weighed average life (WAL) for this loan:

a. 4.02 years

b. 3.04 years

c. 6.54 years

d. 0.33 years