Third Mortgage Investors makes money by purchasing mortgage backed securities (MBS), stripping them into interest only (IO) and principal only (PO) components, and selling the components for more than it paid for the original security.  Suppose the company purchases a $100,000 Face value MBS carrying a coupon of 9 percent and a maturity of 30 years. Assume for the purpose of the following analysis, the MBS will make payments on an “ANNUAL BASIS.” Years Survived Yield (%) 1 6.00 3 7.00 5 8.00 8 9.00   What is the total cash flow received by the purchasers of the IO strip, and the PO strip if the MBS survives 1 year? 3 years? 30 years?

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
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Third Mortgage Investors makes money by purchasing mortgage backed securities (MBS), stripping them into interest only (IO) and principal only (PO) components, and selling the components for more than it paid for the original security.  Suppose the company purchases a $100,000 Face value MBS carrying a coupon of 9 percent and a maturity of 30 years. Assume for the purpose of the following analysis, the MBS will make payments on an “ANNUAL BASIS.”

Years Survived

Yield (%)

1

6.00

3

7.00

5

8.00

8

9.00

 

What is the total cash flow received by the purchasers of the IO strip, and the PO strip if the MBS survives 1 year? 3 years? 30 years?

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