Why is the cash flow of a residential mortgage loan unknown?
Answer to relevant QuestionsIn what sense has the investor in a residential mortgage loan granted the borrower (homeowner) a loan similar to a callable bond? Answer the below questions. (a)What features of an adjustable-rate mortgage will affect its cash flow? (b)What are the two categories of benchmark indexes used in adjustable-rate mortgages? How are FICO scores used in classifying loans? Indicate whether you agree or disagree with the following statement: “The PSA prepayment benchmark is a model for forecasting prepayments for a pass-through security.” What is the bond-equivalent yield if the monthly cash flow yield is 0.7%?
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