The Green Mortgage Company has originated a pool containing 75 ten-year fixed interest rate mortgages with an average balance of $102,200 each. All mortgages in the pool carry a coupon of 12 percent. (For simplicity, assume that all mortgage payments are made annually at 12% interest.) Green would now like to sell the pool to FNMA. (A) Assuming a constant annual prepayment rate of 10 percent (for simplicity, assume that prepayments are based on the pool balance at the end of each year), what will be the price that Green should obtain on the date of issuance if market interest rates were (1) 11 percent? (2) 12 percent? (3) 9 percent? Market Interest Rate Price of the Pool 11% $7,951,446 12% $7,665,000 9% $8,580,288 (B) Assume that five years have passed since the date in (a). What will the pool factor be? If market interest rates are 12 percent, what price can Green obtain then? What is the Pool Factor? What is the Price of the pool after 5 years?
The Green Mortgage Company has originated a pool containing 75 ten-year fixed interest rate mortgages with an average balance of $102,200 each. All mortgages in the pool carry a coupon of 12 percent. (For simplicity, assume that all mortgage payments are made annually at 12% interest.) Green would now like to sell the pool to FNMA.
(A)
Assuming a constant annual prepayment rate of 10 percent (for simplicity, assume that prepayments are based on the pool balance at the end of each year), what will be the price that Green should obtain on the date of issuance if market interest rates were (1) 11 percent? (2) 12 percent? (3) 9 percent?
| Market Interest Rate | Price of the Pool |
| 11% | $7,951,446 |
| 12% | $7,665,000 |
| 9% | $8,580,288 |
(B)
Assume that five years have passed since the date in (a). What will the pool factor be? If market interest rates are 12 percent, what price can Green obtain then?
What is the Pool Factor?
What is the Price of the pool after 5 years?
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