Question

Consider an MPT with the following characteristics:

• Number of mortgages in the pool: 20
• All 20 mortgages are fully amortizing 15 year FRM with monthly payments
• All mortgages have a 3% interest rate
• Average mortgage balance: $100,000
• No prepayment is allowed on these mortgages
• There is a 0.5% servicing fee on the beginning of pool balance in each period

What is the cash cow to investors in month 30?

Answer 1

Step 1

Cash flow:

Cash flow is the net amount of cash and cash-equivalents being transferred into and out of a business. At the most fundamental level, a company’s ability to create value for shareholders is determined by its ability to generate positive cash flows, or more specifically, maximize long-term free cash flow (FCF) Positive cash flow indicates that a company is adding to its cash reserves, allowing it to reinvest in the company, pay out money to shareholders, or settle future debt payments. Cash flow comes in three forms: operating, investing, and financing. Operating cash flow includes all cash generated by a company's main business activities. Investing cash flow includes all purchases of capital assets and investments in other business ventures. Financing cash flow includes all proceeds gained from issuing debt and equity as well as payments made by the company. Free cash flow, a measure commonly used by analysts to assess a company's profitability, represents the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets.

Step 2

Working notes:

Total months on mortgages = 15 Years * 12 months =180 months

Monthly Principal Repayment = 20 * $100,000 / 180 months= $ 11,111.11 per month

Outstanding balance = 20 * $100,000 − $11,111.11 * 29= $1,677,777.78

Net Interest=Beginning pool balance*(Interest rate−Service Fee)/12 =$1,677,777.78 * (3% − 0.5%) / 12 =$1,677,777.78 * (2.5%) / 12 =$3,495.37

Step 3

Cash flow to investor in month 30 is:

Cash flows to investor in month 30 = Principal + Net Interest  $11,111.11 + $3,495.37 =$14,606.48