Reference no: EM13909053
Joi Chatman recently received her finance degree and has decided to enter the mortgage broker business. Rather than working for someone else, she will open her own shop. Her cousin Mike has approached her about a mortgage for a house he is building. The house will be completed in three months, and he will need the mortgage at that time. Mike wants a 15-year, fixed-rate mortgage in the amount of $500,000 with monthly payments. Joi has agreed to lend Mike the money in three months at the current market rate of 4 percent. Because Joi is just starting out, she does not have $500,000 available for the loan; she approaches Ian Turnbell, the president of IT Insurance Corporation, about purchasing the mortgage from her in three months. Ian has agreed to purchase the mortgage in three months, but he is unwilling to set a price on the mortgage. Instead, he has agreed in writing to purchase the mortgage at the market rate in three months. There are Treasury bond futures contracts available for delivery in three months. A Treasury bond contract is for $100,000 in face value of Treasury bonds.
QUESTIONS
1. What is the monthly mortgage payment on Mike's mortgage?
2. What is the most significant risk Joi faces in this deal?
3. How can Joi hedge this risk?
4. Suppose that in the next three months the market rate of interest rises to 6 percent.
a. How much will Ian be willing to pay for the mortgage?
b. What will happen to the value of Treasury bond futures contracts? Will a long or short position increase in value?
5. Suppose that in the next three months the market rate of interest falls to 3 percent.
a. How much will Ian be willing to pay for the mortgage?
b. What will happen to the value of T-bond futures contracts? Will a long or short position increase in value?
6. Are there any possible risks Joi faces in using Treasury bond futures contracts to hedge her interest rate risk?
|
Is it possible for a retail store such as apple
: Is it possible for a retail store such as Apple to use variances in analyzing its operating performance?
|
|
Differences between pwc and other three big four firms
: The Interview with PWC- Why you want to work in Shanghai, China and What kind of leadership experience did you have?
|
|
What is the current market price of these bonds
: Western Enterprises’ bonds have 10 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon rate is 9 percent. The bonds have a yield to maturity of 7 percent. What is the current market price of these..
|
|
What is the current bond price
: Great Wall Pizzeria issued 13-year bonds one year ago at a coupon rate of 7 percent. If the YTM on these bonds is 9.2 percent, what is the current bond price?
|
|
What is the monthly mortgage payment on mikes mortgage
: Joi Chatman recently received her finance degree and has decided to enter the mortgage broker business. Rather than working for someone else, she will open her own shop. Her cousin Mike has approached her about a mortgage for a house he is building. ..
|
|
When the required return on the bonds
: You bought one of Great White Shark Repellant Co.’s 6 percent coupon bonds one year ago for $1,040. These bonds make annual payments and mature 11 years from now. Suppose you decide to sell your bonds today, when the required return on the bonds is 5..
|
|
Origin of organisms such as dinosaurs
: Explain how the origin of organisms such as dinosaurs, whose gait allowed them to move without compressing their lungs, could have led to emergent properties.
|
|
Compare current perspectives of organization effectiveness
: Compare and contrast two of the four current perspectives of organization effectiveness, as explained by McShane and Von Glinow (2013). State which perspective you have real-life experience in or imagine you would like to gain experiences with? Ex..
|
|
How much will street have to deposit in planning account
: James Street's son, Harold, is 10 years old today. Harold is already making plans to go to college on his 18th birthday, and his father wants to start putting money away now for that purpose. Any balance remaining in the account will continue to earn..
|