Use the following short rate tree. Short rate can increase or decrease in 6 months by...
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Use the following short rate tree. Short rate can increase or decrease in 6 months by equal probability. Use semi-annual compounding. Time 0 8% 6-month DF: 0.9615 1-year DF: 0.9249 Time 0.5 12% 6-month DF: 0.9434 4% 6-month DF: 0.9804 Now, consider a 1 year mortgage (semi-annually paid) with a mortgage rate of 10% (so that a semi-annual mortgage rate is 5%) and an initial principal balance of $20,000. The mortgage is divided into three sequential pay tranches. Tranche A receives the first $8,000 of the principal, tranche B receives the next $6,000 of the principal, and tranche C receives the remaining $6,000 of the principal. Briefly explain the difference between value-minimizing prepayment policy and deterministic prepayment policy and how you would value the mortgage under value-minimizing prepayment policy. Use the following short rate tree. Short rate can increase or decrease in 6 months by equal probability. Use semi-annual compounding. Time 0 8% 6-month DF: 0.9615 1-year DF: 0.9249 Time 0.5 12% 6-month DF: 0.9434 4% 6-month DF: 0.9804 Now, consider a 1 year mortgage (semi-annually paid) with a mortgage rate of 10% (so that a semi-annual mortgage rate is 5%) and an initial principal balance of $20,000. The mortgage is divided into three sequential pay tranches. Tranche A receives the first $8,000 of the principal, tranche B receives the next $6,000 of the principal, and tranche C receives the remaining $6,000 of the principal. Briefly explain the difference between value-minimizing prepayment policy and deterministic prepayment policy and how you would value the mortgage under value-minimizing prepayment policy.
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SOLUTION The valueminimizing prepayment policy and the deterministic prepayment policy are two approaches to modeling and valuing mortgagebacked secur... View the full answer
Related Book For
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
Posted Date:
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