FIN 4310 Real Estate Securities
Fall 2015
Assignment 3
Due: October 13, 2015Part 1 (100 points, 10 on each question except 7 which has 10 on each part)
1. Make assumptions as follows for a pass-through mortgage backed security (MBS):
a. initial principal balance (after seasoning) between $300 million and $800 million;b. weighted average coupon (WAC): between 3% and 6%;c. weighted average maturity (before seasoning) (WAM): between 335 and 355 months;d. percent of PSA: between 75 and 200, but not 100;e. seasoning: between 2 and 5 months;f. fees: servicing fee between 25 and 50 basis points and issuer fee/credit enhancement of 85 basis points;g. investor yield: a required return for investors purchasing the MBS that is 0.75% to 1.25% less that the WAC.h. sponsor yield: a required return for the sponsor that is 3% to 5% greater than the WAC.2. What is the pass-through coupon rate?3. What is the conditional prepayment rate in the first month of the MBS?4. What is the single monthly mortality in the first month of the MBS?5. Using the standard MBS payment schedule:
a. Determine the scheduled payment in the first month of the MBS?b. How much of the scheduled payment for the first month is interest? How much of that interest is paid to the mortgage backed security holders?c. How much of the scheduled payment for the first month is principal?d. What is the extra principal payment in the first month of the MBS?6. Answer questions 4a through 4d for the payments in the 30th month.7a. How much will the sponsor receive from sale of the MBS securities to investors?b. What is the aggregate value of the pass-through MBS securities to investors?c. What is the average time to repayment of principal for the pass-through MBS?d. What is the duration of the pass-through MBS?Part 2 (60 points)
1. Assume the MBS from Part 1 is divided into Interest Only (IO) and Principal Only (PO) pass-through securities and these are sold separately to investors that have the same required return as 1g in Part 1.
a. What is the value of the IO securities?b. What is the average time to repayment of principal for the IO securities?c. What is the duration of the IO securities?d. What is the value of the PO securities?e. What is the average time to repayment of principal for the PO securities?f. What is the duration of the PO securities?Part 3. (70 points)
1a. How does the value of the pass-through MBS (7b), change (indicate both change in dollar value and percentage change) if the investors yield (from 1g in Part 1) increases by 0.75% and the percent of PSA (from 1d in Part 1) decreases by 45 (that is, for example, the required return increases from 4% to 4.75%, and the PSA rate decreases from PSA 110 to PSA 65).b. How does the value of the pass-through MBS (7b), change (indicate both change in dollar value and percentage change) if the investors yield (from 1g in Part 1) decreases by 0.75% and the percent of PSA (from 1d in Part 1) increases by 45 (that is, for example, the required return decreases from 4% to 3.25%, and the PSA rate increases from PSA 110 to PSA 155).2a. If the MBS is divided into IO and PO securities, how does the value of the IO pass-through change with the same changes in yield and PSA rate as in question 1a in this Part?
b. If the MBS is divided into IO and PO securities, how does the value of the IO pass-through change with the same changes in yield and PSA rate as in question 1b in this Part?3a. If the MBS is divided into IO and PO securities, how does the value of the PO pass-through change with the same changes in yield and PSA rate as in question 1a in this Part?b. If the MBS is divided into IO and PO securities, how does the value of the PO pass-through change with the same changes in yield and PSA rate as in question 1b in this Part?4. Briefly discuss your findings.