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Problem 19-2

The Green Mortgage Company has originated a pool containing 75 ten-year fixed interest rate mortgages with an average balance of

$104,000 each. All mortgages in the pool carry a coupon of 12 percent. (For simplicity, assume that all mortgage payments are made

annually at 12% interest.) Green would now like to sell the pool to FNMA

Required:

a. Assuming a constant annual prepayment rate of 10 percent (for simplicity, assume that prepayments are based on the pool balance

at the end of each year), what will be the price that Green should obtain on the date of issuance if market interest rates were (1) 11

percent? (2) 12 percent? (3) 9 percent?

b. Assume that five years have passed since the date in (a). What will the pool factor be? If market interest rates are 12 percent, what

price can Green obtain then?

c. Instead of selling the pool of mortgages in (a), Green decides to securitize the mortgages by issuing 100 pass-through securities.

The coupon rate will be 11.5 percent and the servicing and guarantee fee will be 0.5 percent. However, the current market rate of

return is now 9.5 percent. How much will Green obtain for this offering of MPTS? What will each purchaser pay for an MPT security.

assuming the same prepayment rate as in (a)?

d. Assume now that immediately after purchase in (c), interest rates fall to 8 percent and that the prepayment rates are expected to

accelerate to 20 percent per year, beginning at the end of the first year. What will the MPT security be worth now?

Complete this question by entering your answers in the tabs below.

Required A Required B

Answer is complete but not entirely correct.

Required D

Assume now that immediately after purchase in (c), interest rates fall to 8 percent and that the prepayment rates are

expected to accelerate to 20 percent per year, beginning at the end of the first year. What will the MPT security be worth now?

(Do not round intermediate calculations. Round your final answers to the nearest whole dollar)

Price to Green

Value MPT

Required C

s 7,740,508 O

s

3571

Required C

Fig: 1