1. Please re-construct the Mortgage Backed Bond example ($110,000,000 mortgage at 10.50% for 30 years) discussed in class using different default rates and fund interest rates. In the class example, the $110,000,000 mortgage was divided into 100,000,000 Mortgage Backed Bond at 9.5% and 10,000,000 Equity. The default rate used in the class example was 0.5% per year for the first 10 years. The interest rate for the fund was 8%. Please report the same table using 0.3% default rate per year for the first 12 years with 8% fund interest rate. Please repeat the same analysis and report another table using 0.1% default rate per year for the first 12 years with 5% fund interest rate. It should be noted that you might need to make necessary adjustments to the equity amount to make the deal work better for the issuer (when IRR is the highest among all possible equity amounts). Please comment on whether you (as the issuer) should issue these two securities.
1. Please re-construct the Mortgage Backed Bond example ($110,000,000 mortgage at 10.50% for 30 years) discussed in class using different default rates and fund interest rates. In the class example, the $110,000,000 mortgage was divided into 100,000,000 Mortgage Backed Bond at 9.5% and 10,000,000 Equity. The default rate used in the class example was 0.5% per year for the first 10 years. The interest rate for the fund was 8%. Please report the same table using 0.3% default rate per year for the first 12 years with 8% fund interest rate. Please repeat the same analysis and report another table using 0.1% default rate per year for the first 12 years with 5% fund interest rate. It should be noted that you might need to make necessary adjustments to the equity amount to make the deal work better for the issuer (when IRR is the highest among all possible equity amounts). Please comment on whether you (as the issuer) should issue these two securities.
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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Transcribed Image Text:1. Please re-construct the Mortgage Backed Bond example ($110,000,000 mortgage at 10.50% for
30 years) discussed in class using different default rates and fund interest rates. In the class
example, the $110,000,000 mortgage was divided into 100,000,000 Mortgage Backed Bond at
9.5% and 10,000,000 Equity. The default rate used in the class example was 0.5% per year for
the first 10 years. The interest rate for the fund was 8%. Please report the same table using 0.3%
default rate per year for the first 12 years with 8% fund interest rate. Please repeat the same
analysis and report another table using 0.1% default rate per year for the first 12 years with
5% fund interest rate. It should be noted that you might need to make necessary adjustments to
the equity amount to make the deal work better for the issuer (when IRR is the highest among all
possible equity amounts). Please comment on whether you (as the issuer) should issue these two
securities.
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