Question 1) a-What does a conditional prepayment r

27 Jun Question 1) a-What does a conditional prepayment r

Question
1) a-What does a conditional prepayment rate( CPR) of 9% mean? Explain in at least two lines.

b) What is the estimated monthly prepayment rate, commonly referred to as the single-monthly mortality rate (SMM).

c) Suppose that an investor owns a pass-through in which the remaining mortgage balance at the beginning of some month is $100 million. Assuming that the scheduled principal payment is $1 million, what is the estimated prepayment for the month?

5) 12. Suppose that for a securitization with a shifting interest mechanism you are given the following information for some month:

subordinate interest = 20%

shifting interest percentage = 85%

regularly scheduled principal payment = $2,000,000

prepayments = $1,000,000

a. What is the senior prepayment percentage for the month?

b. How much of the $2,000,000 regularly scheduled principal payment is distributed to the senior class?

c. How much of the $1,000,000 is distributed to the senior class?

7. In an article by Matt Hudgines “More CMBS Borrowers Pay off Balloon Mortgages on Time,” posted on August 18, 2010, the following appeared

“Some 49.9% of the securitized loans that matured in July successfully met their balloon payments, according to New York-based Trepp LLC, which closely tracks the commercial mortgage-backed securities (CMBS) market. That’s up more than 11 percentage points from 38.7% the previous month and is the highest level since the end of 2008.”

Later in the article, the following appeared:

“Until the fourth quarter of 2008, when financial markets experienced a meltdown following the bankruptcy of Lehman Brothers, the monthly average for the number of on-time, paid balloon payments was more than 70%, according to Trepp. Since the beginning of 2009, there hasn’t been a month when even half of the borrowers with CMBS loans reaching maturity were able to make their balloon payments. The average percentage for the past 12 months has been 32.2%.”

(See: http://nreionline.com/finance/news/cmbs_borrowers_pay_balloon_mortgages_0818/#)

Explain(in your own words)at least three points of relevance of this information to investors in CMBS.

9)A corporation is considering a securitization and is considering two possible credit enhancement structures backed by a pool of automobile loans. Total principal value underlying the asset-backed security is $300 million.

Principal Value for:

Structure I

Structure II

Pool of automobile loans

$301 million

$305 million

Senior class

$280 million

$270 million

Subordinated class

$20 million

$30 million

Answer the below questions.

(a) Which structure would receive a higher credit rating and why?

b) What forms of credit enhancement are being used in both structures?

11) Suppose that the following values for a RMBS are correct for each assumption:

PSA Assumption

Value of Security

192

112.10

194

111.80

200

111.20

202

111.05

210

110.70

Assuming that the value of the security in the market is 111.80 based on 194 PSA.

a) What is the prepayment sensitivity of this security?

b) What does that mean? Explain in one paragraph.

12) An analysis of a CMO structure using the Monte Carlo method indicated the following, assuming 12% volatility:

OAS (basis points)

Static Spread (basis points)

Collateral

80

120

Tranche

PAC I A

30

60

PAC I B

50

80

PAC I C

55

95

PAC II

90

125

Support

80

250

(a) Calculate the option cost for each tranche.

b) Which tranche is clearly too rich?

(c) What would happen to the static spread for each tranche if a 15% volatility is assumed?

19. Why is the tracking error more important than portfolio variance of returns when a portfolio manager’s performance is measured versus a benchmark?