What is the syntheticcoupon rate on Class X-1?
What will be an ideal response?
Class X-1 receives 10% or 0.10 of the interest. Because the coupon rate is 8%, it effectively will receive 0.1(8%) = 0.80%. More details are supplied below concerning the relationship between yield and price that Class X-1 investors can expect.
A stripped MBS is created by altering the distribution of principal and interest from a pro rata distribution to an unequal distribution. Some of the securities thus created will have a price-yield relationship that is different from the price-yield relationship of the underlying mortgage pool. Class X-1 receives 75% of the principal and 10% of the interest. Thus, it is more like a PO which is purchased at a substantial discount from par value. The yield an investor will realize on a PO depends on the speed at which prepayments are made. The faster the prepayments, the higher the yield the investor will realize.
For example, suppose that there is a pass-through backed by 30-year mortgages with $400 million in par value and that investors can purchase POs backed by this pass-through for $175 million. The dollar return on this investment will be $225 million. How quickly that dollar return is recovered by PO investors determines the yield that will be realized. In the extreme case, if all the homeowners in the underlying mortgage pool decide to prepay their mortgage loans immediately, PO investors will realize the $225 million immediately. At the other extreme, if all homeowners decide to keep their houses for 30 years and make no prepayments, the $225 million will be spread out over 30 years, which will result in a lower yield for PO investors.
You might also like to view...
The marketing manager of Raven Golf Club finds that the club can increase its market share if it slashes membership prices during the first quarter of the year. However, it would mean that the club will not achieve its target return on investment. This conflict illustrates
A. the need to eliminate low-profit products. B. a lack of competition in the marketplace. C. how pricing operates in an ideal marketplace. D. the need for trade-offs in pricing objectives.
The selection of a particular inventory valuation method has a significant effect on certain key ratios
a. True b. False Indicate whether the statement is true or false
Hao is a new lawyer in your real estate law firm who comes highly recommended to you because of his high intelligence and experience with real-estate law. You encourage him to be creative and use innovation in problem solving when working on cases. You are using which transformational factor?
A. intellectual stimulation B. contingent reward C. individualized consideration D. idealized influence
You need to buy a gift for a young cousin's birthday. At the mall you see a girl wearing a Hello Kitty t-shirt. You remember there is a store nearby with a lot of Hello Kitty merchandise so you go there and buy a little backpack. When you give it to your cousin, she is very excited. In terms of behavioral learning, your purchase at the Hello Kitty store was a ________.
A. cue B. drive C. prompt D. reinforcement E. response