The Home Loan Corp, Inc (HLC) originates a pool containing 100 five year mortgag

Question

The Home Loan Corp, Inc (HLC) originates a pool containing 100 five year mortgages, with an average balance of $150,000 each. All mortgages in the pool carry a fixed interest rate of 6% (assume all payments are made annually). HLC now wishes to sell the pool of mortgages to the FHLMC a. Assuming prepayments are constant at 10% (of the mortgage pool balance at the end of the previous year), what is the price of the pool of mortgages if the FHLMC wishes to obtain a rate of return equal to 7%? b. If the required rate of return for FHLMC increases to 9%, and prepayments fell to zero, how would your answer to part (a) change?

Explanation / Answer

a. Total face value of the mortagages = 1000*150,000 = 15,000,000

Since prepayments are 10%, the actual face value = 15,000,000 - 1,500,000 = 13,500,000

Coupon payment is = 0.06* 13,500,000 = 810,000

Rate of return = 0.07

and number of years = 5

The price of the pool of mortages = pv(rate,nper,pmt,fv) =pv(0.07,5,810000,13500000) = $12,946,473.35

b. When there is no prepayment, the Face value = 15,000,000

number of years = 5

rate = 0.09

Coupon payment = 0.06*15000000=900,000

Hence price of the pool = pv(0.09,5,900000,15000000)= $13,249,656.93

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.