REES 3400 Homework 4

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Baruch College, CUNY REES 3400 Question 1 Consider an MPT that is backed by 100 mortgages with average balance of $350,000 and monthly payment. The MPT has a WAC = 5% and WAM = 60 months. There is no servicing fee on this security. Assuming the prepayment model of CPR=5% and market rate is 3%, how much should this security sell for? Answer ...[Show More]

Baruch College, CUNY
REES 3400
Question 1 Consider an MPT that is backed by 100 mortgages with average balance of $350,000 and

monthly payment. The MPT has a WAC = 5% and WAM = 60 months. There is no

servicing fee on this security. Assuming the prepayment model of CPR=5% and market

rate is 3%, how much should this security sell for?

Answer Use Excel for this question to compute cash ows to investors in each of the 60 months.

Don't forget to convert CPR into SMM for prepayments. Then use the NPV formula to

discount the cash ows using the monthly market rate 3%/12:

NP V =

CF1

+

CF2

+ ::: +

CF60

(1 + 3%=12)1 (1 + 3%=12)2 (1 + 3%=12)60 = $36; 616; 901:96 (1)

Question 2 Consider an MPT that is backed by 50 mortgages with average balance of $400,000 and

yearly payment. The MPT has a WAC = 6% and WAM = 15 years. There is no servicing

fee on this security. Assuming there is no prepayment and market rate is 3%, how much

should this security sell for?

Answer In this example cash ow is the same for all 15 years, because there is nothings that investors

pay or receive that is 1) ahead of schedule (prepayment) 2) depends on pool balance (think

servicing fee). PV=50*$400,000=$20,000,000, i=6%, N=15, so PMT = $2,059,255.28. We can

compute NPV using the formula as in question 1 or as PV( PMT = $2,059,255.28,r=3%,N=15)=$24,583,255.8

Question 3 Consider an MPT with WAC=5% with par value of $5,000,000. There is a servicing fee of

0.4% a year for this security. Mark all statements that are true:

A If market rate is 7%, the MPT will sell above par value

B If market rate is 7%, higher projected prepayment rates will result in higher valuation

for the MPT

C If market rate is 5%, the MPT will sell at $5,000,000 D

If market rate is 4.6%, the MPT will sell at $5,000,000

E If market rate is 4.6%, higher projected prepayment rates will result in higher

valuation for the MPT

Answer A is false. Then WAC is below what investors can get on the market, they will pay less than

par value.

B is true. Then WAC is below the market rate, an investor would like to get their money

back early, so prepayment increases the value of the MPT.

C is false. The investors would only pay $5,000,000 is they expect to make 5% return.

However with servicing fee, the pass-through rate is only 4.6%.

D is true. When the pass through rate is equal to the market rate, a security is worth it's

par value.

E is false. When the pass through rate is equal to the market rate, prepayment does not a

ect the valuation of a security (investors don't care about getting the payment early if they

can reinvest it at the same rate