Consider the following fixed-rate level-payment mortgage pass-through security: Total principal outstanding = $10,000,000 Weighted average mortgage (Note)
Question:
Consider the following fixed-rate level-payment mortgage pass-through security:
Total principal outstanding = $10,000,000
Weighted average mortgage (Note) rate = 8.25%
Weighted average remaining maturity = 30 years (360 months)
Pass-through rate=7.5%
a. What is the scheduled monthly mortgage payment if there is no prepayment?
b. Assume that you are an investor in the pass-through security. Calculate the interest and scheduled principal repayment received by you for the sixth month.
c. Assume 125 PSA pre-payment. What is the amount of prepayment in the sixth month?
1. The T-bond futures contracts all have a face value of $100,000.So the price of one T-bond futures contract is:(100,000/100)*(93+2/32).In your answer, you should mention whether this is a long or short hedge.
2. In your answer, you should mention whether this is a long or short hedge. It did not tell you whether the interest rate is going to go up or down. But given that the duration gap of the financial institution is negative, the institution is more worried about a decline in interest rate. So you are trying to hedge the risk of declining interest rate in this example.
Fixed Income Securities Valuation Risk and Risk Management
ISBN: 978-0470109106
1st edition
Authors: Pietro Veronesi