Reference no: EM131326549
An investor is considering the purchase of either an IO or PO strip from a CMO offering. The portion of the mortgage pool backing this tranche consists of $1,000,000 in mortgages with a remaining maturity of 10 years and an 8 percent interest rate.
a. Assuming annual payments and a zero prepayment rate, prepare a schedule showing the IO and PO cash flows that would be payable to investors in this tranche. If the interest rate demanded by investors on this investment is also 8 percent, what would be the prices of the 10 and PO strips?
b. If interest rates increased to 10 percent and prepayments remained at a zero rate, how would the price of the IO and PO strips change? Which security, the IO or PO, exhibits the greatest price change from (a)? Why?
c. Investor interest rates now decline to 6 percent. What is the price of the IO? PO? Prepayments now increase to a rate of 20 percent per year because mortgage borrowers in the pool begin to refinance at lower interest rates. What would prices for the IO and PO be now?
(Assume that the 20 percent prepayment received at the end of each year is based on the outstanding loan balances at the end of the preceding year.) Which security, the IO or PO, exhibits the greatest change in price when compared to (a) and (b) above? Why? What does this pattern suggest about the relative risk of each security?
|
Discuss the aspects of your personality
: Discuss which aspects of your personality have remained consistent and which aspects of your personality have changed over time. Then, analyze the roles of nature and nurture in shaping your personality. Subsequently, discuss possible sources of i..
|
|
Explain what changes should be made to sarbanes-oxley act
: ACC 564- Evaluate what changes should be made to both the Sarbanes-Oxley Act of 2002 and other current laws in order to make them more effective in deterring companies from committing crimes.
|
|
Why default f risk in a cmbs offering given more attention
: In what ways is a CMBS structure different from a CMO backed by residential mortgages? Why is default F risk in a CMBS offering given more attention?
|
|
What will be the maturity of each tranche
: What will be the weighted average coupon (WAC) on the CMO when issued?- What will be the maturity of each tranche assuming no prepayment of mortgages in the pool?
|
|
How would the price of the io and po strips change
: If interest rates increased to 10 percent and prepayments remained at a zero rate, how would the price of the IO and PO strips change?
|
|
What happens to cash distributions
: What happens to cash distributions? Which class of investors experiences more volatility in cash flow and, therefore, price volatility? Why?
|
|
What would be the new price for each bond
: If the market rate of interest on each bond fell from 10 percent to 7 percent and the durations found in part (a) remained constant, what would be the new price for each bond?
|
|
What are the general requirements regarding income
: What are the general requirements regarding income, investments, and dividends with which a REIT must comply to maintain its tax-exempt status?
|
|
Difference between eps and funds from operation
: What is the difference between earnings per share (EPS), funds from operations (FFO), adjusted funds from operations (AFFO), and dividends per share?
|