Please show step by step how to solve and please show all formulas. The Green Bank originates a pool of containing 100 30-year fixed-rate mortgages with loan amount of $250,000 each.  All mortgages in the pool carry a rate of 6.5% with monthly payments. The servicing fee is 0.05% each month. The Green Bank would like to sell the pool to investors via IO/PO Strips. Suppose that they issue 150,000 shares of IO/PO Strips and the market interest rate is 6%.   Questions   A. Assume that there are no prepayment and no default, how much an investor would like to pay for each share of the IO/PO Strips?   B. What is the price of each share of the IO/PO Strips if there are a constant prepayment rate of 1.5% every month and no default?   C. What is the price of each share of the IO/PO Strips if there are a constant default rate of 1.5% every month (assuming the recovering rate is 50%) and no prepayment?   D. Please briefly explain your findings.

EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter16: Working Capital Policy And Short-term Financing
Section: Chapter Questions
Problem 24P
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Please show step by step how to solve and please show all formulas.

The Green Bank originates a pool of containing 100 30-year fixed-rate mortgages with loan amount of $250,000 each.  All mortgages in the pool carry a rate of 6.5% with monthly payments. The servicing fee is 0.05% each month. The Green Bank would like to sell the pool to investors via IO/PO Strips. Suppose that they issue 150,000 shares of IO/PO Strips and the market interest rate is 6%.

 

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A. Assume that there are no prepayment and no default, how much an investor would like to pay for each share of the IO/PO Strips?

 

B. What is the price of each share of the IO/PO Strips if there are a constant prepayment rate of 1.5% every month and no default?

 

C. What is the price of each share of the IO/PO Strips if there are a constant default rate of 1.5% every month (assuming the recovering rate is 50%) and no prepayment?

 

D. Please briefly explain your findings.

 

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