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1) Why are bond rating agencies so vital in the MBS market?

1) Why are bond rating agencies so vital in the MBS market?

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Task 3: CMBS (1) Why are bond rating agencies so vital in the MBS market? (2) Consider a $100 million loan pool, packaged, and sold in securities of $1,000 each. The loans in the pool have five years to run, a 9% interest rate, they are fully amortizing, and there is no prepayment or default. The loan servicing charge is 1.5% of the loan balance outstanding. a. If you want to offer a security at a yield of 10.5%, what is the price of the security? 6. for correct cash flows, 1 for correct price) b. What discount does that represent to the face value of the security? e, (3) A mortgage pool has $1 billion in par value. The senior (A) tranche has 30% credit support (subordination). The next tranche (B) has 25% credit support (subordination). a. How much par value (principal) was issued in the A tranche?? b. How much par value (principal) was issued in the B tranche? 1
Transcribed Image Text:Task 3: CMBS (1) Why are bond rating agencies so vital in the MBS market? (2) Consider a $100 million loan pool, packaged, and sold in securities of $1,000 each. The loans in the pool have five years to run, a 9% interest rate, they are fully amortizing, and there is no prepayment or default. The loan servicing charge is 1.5% of the loan balance outstanding. a. If you want to offer a security at a yield of 10.5%, what is the price of the security? 6. for correct cash flows, 1 for correct price) b. What discount does that represent to the face value of the security? e, (3) A mortgage pool has $1 billion in par value. The senior (A) tranche has 30% credit support (subordination). The next tranche (B) has 25% credit support (subordination). a. How much par value (principal) was issued in the A tranche?? b. How much par value (principal) was issued in the B tranche? 1
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