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Problem
Consider $200 million of 30-year mortgages with a coupon of 10 percent paid quarterly.
1. What is the quarterly mortgage payment?
2. What are the interest repayments over the first year of life of the mortgages? What are the principal repayments?
3. Construct a 30-year CMO using this mortgage pool as collateral. There are three tranches (where A offers the least protection against prepayment and C offers the most). A $50 million tranche A makes quarterly payments of 9 percent; a $100 million tranche B makes quarterly payments of 10 percent; and a $50 million tranche C makes quarterly payments of 11 percent.
4. Assuming no amortization of principal and no prepayments, what are the total promised coupon payments to the three classes? What are the principal payments to each of the three classes for the first year?
5. If, over the first year, the trustee receives quarterly prepayments of $10 million on the mortgage pool, how are the funds distributed?
6. How can the CMO issuer earn a positive spread on the CMO?
Systemic Risk : - Why was the Federal Reserve concerned about systemic risk due to the financial problems of Bear Stearns?
Unit 1 Assignment: Article Summary Write a review of an article from the Kaplan University Library relating to Qualified plans and write a review and analysis. Use more than one article as part of your analysis on the topic.
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Give an example of a time when you and/or your company have used a similar process for decision making.
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