Question

# Time

Principal

1

5

2

10

3

/>

20

4

40

5

80

Total

155

7. Given the below single month mortality rates for a mortgage security. What are the corresponding conditional prepayment rates?

Age

SMM

CPR

5

0.6

(a)

6

1.0

(b)

7

2.0

(c)

8

5.0

(d)

- Given the below par-yield curve, what is the spot curve?
- Suppose you have a 8.5% coupon paying mortgage bond. Given the information in question 8 above, suppose the weighted average life is 2.25. What is the WAL yield spread to par?
- Suppose you have a 8.5% coupon paying mortgage bond. Given the information in question 8 above, and the below bond cash flows, what is the yield curve spread to the spot curve?
- Given the information in question 8, what are the 1-year forward rates based upon the spot curve?
- Given the cash flows from question 10 and the 1-year forward rates in question 11, what is the yield curve spread when using the forward rates?
- Compute the effective durations and effective convexities of the securities in the below table.

Year

1

2

3

4

5

Par Curve

3.0%

5.0%

8.0%

9.0%

9.5%

Spot Curve

(a)

(b)

(c)

(d)

(e)

Year

Cash Flow

1

39.50

2

31.65

3

24.28

4

17.38

5

10.98

Year

1

2

3

4

5

1-Year Forward Rates

(a)

(b)

(c)

(d)

Bond 1

Bond 2

Bond 3

-50 bp

55.83

105.19

23.03

Base

45.00

104.22

26.75

+ 50 bp

36.38

103.03

29.92

Effective Duration

(a)

(b)

(c)

Effective Convexity

(d)

(e)

(f)

14. Using the calculated durations and convexities in question 13, what would be the new prices of Bonds 1, 2 and 3 if interest rates rose by 25 basis points?

Bond 1

Bond 2

Bond 3

Price + 25 bp

(a)

(b)

(c)