Question

Given a $7,500,000 pool of 10 year FRMs making annual payments with a 10% interest rate a PO and IO class of securities is formed. What is the present value of the PO class if the market rate is 11%? Assume no prepayment, servicing fees, or defaults. Round to the nearest dollar.

Answer 1

	ANSWER = 1
	Step 1 : Calculation of Annual Coupon Payments
	Par value of the bond issued is   =			$          75,00,000
	Annual Coupon %			$                           0
	Annual Coupon Amount			$             7,50,000
	Step 2: Calculate number of years to Maturity
	Number of years to maturity = 10 years
	Step 3 : Yield to Maturity = 11%, So discount rate = 11%
	PVF = 1 / Discount rate = 1/ 1.11
	Result of above will again divide by 1.11 , repeat this till last period
	Option 1= Life of the bond is 10 years
	CALCULATION OF CURRENT MARKET PRICE OF THE BOND OR PURCHASE PRICE
	Years	Interest	Amount	PVF @ 11%	PresentValue
	1	Interest	$              7,50,000	0.9009	$         6,75,676
	2	Interest	$              7,50,000	0.8116	$         6,08,717
	3	Interest	$              7,50,000	0.7312	$         5,48,394
	4	Interest	$              7,50,000	0.6587	$         4,94,048
	5	Interest	$              7,50,000	0.5935	$         4,45,088
	6	Interest	$              7,50,000	0.5346	$         4,00,981
	7	Interest	$              7,50,000	0.4817	$         3,61,244
	8	Interest	$              7,50,000	0.4339	$         3,25,445
	9	Interest	$              7,50,000	0.3909	$         2,93,194
	10	Interest	$              7,50,000	0.3522	$         2,64,138
	10	Bond Value	$            75,00,000	0.3522	$       26,41,384
		Total			$       70,58,308
		Current price of the Bond =		$          70,58,308