A 4-year, 5.5%, $10,000,000 mortgage pool has been established for the issue of 100 units of...

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A 4-year, 5.5%, $10,000,000 mortgage pool has been established for the issue of 100 units of pass-through security. The mortgages require annual mortgage payments. The pass-through will carry a pass-through rate of 5% and a servicing fee of 0.5%. Consider the following two assumptions for mortgage borrowers' prepayment behaviour as a response to the movement in market interest rate. Pass-through A No prepayment throughout the entire term of the mortgages regardless of the market interest rate level. Pass-through B 12% of the outstanding pool balance is expected to be prepaid at the end of each year from year 2 to 3 if market interest rate is favourable for prepayment. a) Determine the market value of pass-through A if the market interest rate for the pass- through is 4.75%. (10 points) b) Determine the market value of pass-through B if the market interest rate for the pass- through is 4.75%. (10 points) c) If the market interest rate increases to 5.75%, what is the difference in price between B and A? (5 points) A 4-year, 5.5%, $10,000,000 mortgage pool has been established for the issue of 100 units of pass-through security. The mortgages require annual mortgage payments. The pass-through will carry a pass-through rate of 5% and a servicing fee of 0.5%. Consider the following two assumptions for mortgage borrowers' prepayment behaviour as a response to the movement in market interest rate. Pass-through A No prepayment throughout the entire term of the mortgages regardless of the market interest rate level. Pass-through B 12% of the outstanding pool balance is expected to be prepaid at the end of each year from year 2 to 3 if market interest rate is favourable for prepayment. a) Determine the market value of pass-through A if the market interest rate for the pass- through is 4.75%. (10 points) b) Determine the market value of pass-through B if the market interest rate for the pass- through is 4.75%. (10 points) c) If the market interest rate increases to 5.75%, what is the difference in price between B and A? (5 points)