Question

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

Answer 1

Discount rate
	5%	7%	4.60%	4.60%	7%		Service charge =0.4%
Present value =Par value/(1+discount rate)	5000000/(1.05)	5000000/(1.07)	5000000/(1.046)	5000000/(1.046)	5000000/(1.07)		Par Value=	5000000
	4761904.762	4672897.196	4780114.723	4780114.723	4672897.196
Service charge =0.4%	47619004.76*0.04	4672897.196*0.04	4780114.723*0.04	4780114.723*0.04	4672897.196*0.04
	1904760.19	186915.8878	191204.5889	191204.5889	186915.8878
Final amount =PV - service charge	4571428.572	4485981.308	4588910.134	4588910.134	4485981.308

As we know that the price of bond is inversely proportion to its yield or discount rate.

Scenario 1: If the market rate is 5%. ideally if the market rate is same as discount rate the MPT should sell at 5000000 but since there is a service fee, it will sell at a lower price than 5000000. So this scenario is false

Scenario 2: If the market rate is 7% higher projected prepayment rates will result in higher value of the MPT

If the market rate is 7% the MPT should sell at a price lower than 5000000. Since the investor could get a better rate (7%) at market than buying the MPT (5%). The MPT seller has to lower the price of the MPT. So this scenario is false

Scenario 3: If the market rate is 4.6% the MPT will sell at 5000000

If the market rate is 4.6% the MPT should sell at a price higher than 5000000. Since the investor could get a better rate buy buying the MPT (5%) then investing in the market. So this scenario is true.

Scenario 4: If the market rate is 4.6% higher projected prepayment rates will result in higher value of the MPT

If we consider the scenario 3, this scenario will be false.

Scenario 5: If the market rate is 7% the MPT will sell above the par value of 5000000

If we consider the scenario 2, this scenario will be false.