Bank of America issues a MBS deposit inveteobjurgate on a hypothecation pool with the subjoined terms:
Hypothecation pool esteem $25,000,000
Hypothecation curiosity-behalf objurgate 6.5%
Mortgage Term 3 years
a) Regard that the MBS has singly single systematize of deposit, i.e., the basic MBS discussed during the systematize. What is the value of this MBS if the trade curiosity-behalf objurgate is 5.75%? Feign annual compounding as well-mannered-mannered as a true annual prepayment objurgate of 10% (inveteobjurgate on the uncollected mortgage quantity at the inception of each year, the corresponding as the circumstance we discussed during the systematize).
Now, another boarding bank suggests that, instead of creating the single-systematize MBS deposit as over, span systematizees of securities can be created inveteobjurgate on the corresponding hypothecation pool, i.e., an IO and a PO deposit.
b) Determine the value of the IO and PO deposit, grand that there is no prepayment. Further feign that the IO investors claim a trade objurgate of come-back of 4.5% and the PO investors claim a trade come-back of 6%.
c) Now regard restraintthcoming curiosity-behalf objurgates succeed decline, so there is a 10% prepayment restraint each year (prepayment watchfulness is inveteobjurgate on the mortgage poise at the inception of the year). The IO and PO investors claim a trade objurgate of come-back of 4% and 5.5%, respectively. Determine the values of the IO and the PO deposit.
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