Question

QUESTION 3

Use the information below to answer questions 3 through 5.

The Cashman mortgage company originated a pool containing 25 five-year fixed interest rate mortgages with an average balance of $100,000 each. All mortgages in the pool carry a coupon of 10%. (For simplicity, assume that all mortgage payments are made annually at 10% interest.) Assuming a constant annual prepayment rate of 10% (for simplicity, assume that prepayments are based on the pool balance at the end of the preceding year and begin at the end of year 1).

Assume that one year has passed since the mortgage pool created, what will be the pool factor ? (Choose the nearest value)

	a.	0.74
	b.	0.84
	c.	0.94
	d.	0.64

QUESTION 4

What is total principal and interest payment for year 2? (Choose the nearest value)

	a.	$909,494
	b.	$580,626
	c.	$764,677
	d.	$659,494

QUESTION 5

If the Cashman mortgage company decides to securitize the mortgages by issuing 1000 pass-through securities (MPTs). The servicing and guarantee fee will be 0.5% (based on pool balance at the end of the previous year). The current market rate of return is 8.5%. If each individual investor could only purchase one MPT, then what is the rate of return to these individual investors?

	a.	10%
	b.	9.5%
	c.	10.5%
	d.	8.5%

I need the correct answers. Thank you in advance.

Answer 1

	No of mortgages	25.00
	Average mortgage balance	100,000.00
	Coupon rate	10%
	Prepayment rate	10%
	Payment per period	659,493.70	Using PMT formula with rate 10% and nper as 5 and PV as -2500000
3	Year	Pool balance	Payment per period	Prepayment	Total Payment to investors
	0	2,500,000.00	659,493.70	250,000.00	909,493.70
	Interest amount for Year 0	250,000.00	10%*2500000
	Principle paid in year 0	659493.7	payment per period - Interest amount in year 0 + Prepayment
	Pool factor	0.74	(Pool balance Year 0 - Principle paid in year 0)/Pool balance year 0
	Answer is A
4	Year	Pool balance	Payment per period	Interest for period	Principle paid	Principle Prepayment	Total principle paid	Total Payment to investors
	0	2,500,000.00	659,493.70	250000	409,493.70	250,000.00	659,493.70	909,493.70
	1	1,840,506.30	659,493.70	184,050.63	475,443.07	184,050.63	659,493.70	843,544.33
	2	1,181,012.60	659,493.70	118,101.26	541,392.44	118,101.26	659,493.70	777,594.96
	Answer is 764677 i.e. c
5	Since coupon rate is 10%
	Service fee is 0.5%
	Rate of return	9.50%
	Answer is B