Using an options prepayment model, calculate the yield on the following fully amortizing MBS d$.$ What are the expected annual cash flows for each possible situation over the three$-$year period?

Term $($yrs$)3$

PV MBA $ $50,000,000$

Coupon $(\%)6\mathrm{.}5\%$

Market Yield $(\%)6\mathrm{.}8\%$

Assume no servicing or guarantee fee applies

a$.$ What is the annual payment on the GNMA pass$$through$?$

b$.$ What is the present value of the GNMA pass$$through$?$

e$.$ The Treasury Bond yield curve is flat

Discount yield $6\%$

c$.$ Interest rates change $+$ or $-\mathrm{.}5\%$ per year and are equally likely What is the OAS on the MBS$?$

If interest rates fall $1\%$ below the current mortgage coupon rate all mortgages in the pool will prepay Hint try and use Excel's Solver Add$-$in to calculate

Diagram the interest rate tree and indicate probabilities of each node in the tree