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

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:

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

If market rate is 7%, higher projected prepayment rates will result in higher valuation for the MPT

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

If market rate is 4.6%, higher projected prepayment rates will result in higher valuation for the MPT

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

Solutions

Expert Solution

The only correct answer is the option that states: If market rate is 5%, the MPT will sell at $5,000,000

It's very similar to a bond except that actual WAC realized by investor will be = WAC = 5%

If WAC realized = 5% > yield or market rate; the MPT will sell above par

If WAC realized = 5% = yield or market rate; the MPT will sell at par

If WAC realized = 5% < yield or market rate; the MPT will sell below par

Based on this, let's examine each option:

  • If market rate is 5%, the MPT will sell at $5,000,000. TRUE. If WAC realized = 5% = yield or market rate; the MPT will sell at par
  • If market rate is 7%, higher projected prepayment rates will result in higher valuation for the MPT. This is FALSE. In this case, the MPT will have lower valuation as WAC < Yield or market rate.
  • If market rate is 4.6%, the MPT will sell at $5,000,000. This is FALSE. If WAC realized = 4.6% < yield or market rate; the MPT will sell at discount.
  • If market rate is 4.6%, higher projected prepayment rates will result in higher valuation for the MPT. FALSE. If WAC realized = 4.6% = yield or market rate; the MPT will sell at par.
  • If market rate is 7%, the MPT will sell above par value. FALSE. If WAC realized = 4.6% < yield or market rate; the MPT will sell below par.

Hence, the only correct answer is the option that states: If market rate is 5.0%, the MPT will sell at $5,000,000

jeff jeffy answered 1 year ago
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