Take-Home Midterm Exam

RES 9850 Real Estate Capital Market

Take-home Midterm Exam

(Due by Tuesday 11/29/2011)

Consider the following pool of mortgage pass-through securities

i.  The size of the mortgage backed security pool is $500,000,000

ii.  The WAC is 8%

iii.  The WAM is 357 months

iv.  Servicing fees are 0.5% of the balance every year, and the investor receives 7.5% coupon at monthly payment frequency for the outstanding balance;

v.  The loans are interest-only for the first 10 years (120 months) and then fully amortize over the remaining 20 years.

Hint: Note in the first 10 years of the loan, all mortgage principal payment is due to prepayment, since there is zero scheduled principal payment.

For Question 1 to 3 assume that the PSA will NOT change when market interest rate changes.

Q1. Calculate and graph the mortgage payment and mortgage balance for the entire pass-through pool under the baseline case of 165% PSA.

Q2. Calculate and graph the price and yield relationship for the pool under the baseline assumption of 165% PSA at various market required yield?

Yield / 4.5% / 5.5% / 6.5% / 7.5% / 8.5% / 9.5% / 10.5%
% PSA / 165% / 165% / 165% / 165% / 165% / 165% / 165%
Price of the MPT

Q3. Calculate and graph the yield and duration relationship for the mortgage pass-through pool under the baseline assumption of 165% PSA, as well as the average life of the pool:

Yield / 4.5% / 5.5% / 6.5% / 7.5% / 8.5% / 9.5% / 10.5%
% PSA / 165% / 165% / 165% / 165% / 165% / 165% / 165%
Aver Life
Modified Duration of MPT

For Question 4, assume that the PSA will change when market interest rate changes in the following manner:

Yield / 4.5% / 5.5% / 6.5% / 7.5% / 8.5% / 9.5% / 10.5%
% PSA / 410% / 270% / 200% / 165% / 150% / 120% / 60%

Q4. Calculate and graph the price at various yields for the mortgage pass-through securities.

Yield / 4.5% / 5.5% / 6.5% / 7.5% / 8.5% / 9.5% / 10.5%
% PSA / 410% / 270% / 200% / 165% / 150% / 120% / 60%
Price of MPT
Aver Life
Duration

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