Problem
Using an options prepayment model, calculate the yield on the following fully amortizing MBS
|
Term (yrs)
|
3
|
|
PV MBA $
|
50,000,000
|
|
Coupon (%)
|
6.5%
|
|
Market Yield (%)
|
6.8%
|
Assume no servicing or guarantee fee applies
Task
1. What is the annual payment on the GNMA pass through?
2. What is the present value of the GNMA pass through?
3. Interest rates change + or - .5% per year and are equally likely. If interest rates fall 1% below the current mortgage coupon rate all mortgages in the pool will prepay. Diagram the interest rate tree and indicate probabilities of each node in the tree.