Please Answer Only Question 5 - Mortgage-Backed Securities Question: >> 5. Suppose interest rates decrease. What would you expect to happen to the duration of this MBS and why? a. Decrease because borrowers must pay more money for their loans b. Decrease because borrowers increase prepayment by refinancing their loans c. Increase because borrowers decrease their rate of prepayment d. Increase because borrowers default more on their loans e. Not enough information to answer Please Answer Only Question 5 - Mortgage-Backed Securities Question: >> 5. Suppose interest rates decrease. What would you expect to happen to the duration of this MBS and why? a. Decrease because borrowers must pay more money for their loans b. Decrease because borrowers increase prepayment by refinancing their loans c. Increase because borrowers decrease their rate of prepayment d. Increase because borrowers default more on their loans e. Not enough information to answer

Use the following information on a mortgage-backed security for Problems 15. You are examining a mortgage-backed security with the following features: - $500 million in underlying mortgages (e.g., principal value =$500 million) - Three time tranches (or sequential tranches), A, B, and C where the par value of A is $200 million, the par value of B is $100 million, and the par value of C is $200 million. A is senior to B and B is senior to C. - The weighted average coupon (WAC) is 6%; the pass-through rate is 5% - The security has a weighted average maturity (WAM) of 3 years and payments are made annually (e.g., so it will only make 3 payments). - For Questions 1-2, assume that there is no default and no prepayment. Total MBS Issue: Tranche A: Tranche B: Tranche C: [F 1. What is the value of X ? 2. What is the value of Y ? Use the following information on a mortgage-backed security for Problems 15. You are examining a mortgage-backed security with the following features: - $500 million in underlying mortgages (e.g., principal value =$500 million) - Three time tranches (or sequential tranches), A, B, and C where the par value of A is $200 million, the par value of B is $100 million, and the par value of C is $200 million. A is senior to B and B is senior to C. - The weighted average coupon (WAC) is 6%; the pass-through rate is 5% - The security has a weighted average maturity (WAM) of 3 years and payments are made annually (e.g., so it will only make 3 payments). - For Questions 1-2, assume that there is no default and no prepayment. Total MBS Issue: Tranche A: Tranche B: Tranche C: [F 1. What is the value of X ? 2. What is the value of Y