Q-5. Given a oater/inverse oater class with $20,000,000 principal and even allot

Question

Q-5. Given a oater/inverse oater class with $20,000,000 principal and even allotments to the oater and inverse oater class, and a pool of 4% FRMs with annual payments, what is the payment to the inverse oater class if the index rate increases to 9.5% in the next period? A. $O B. $400,000 C. $800,000 D. $950,000 E. $1,900,000 Q-8. Which of the following is true of the companion class that is issued with a PAC security? A. Companion class securities are shielded from extension and contraction risk B. Companion class investors are only protected against extension risk C. Companion class investors are only protected against contraction risk D. Companion class investors absorb prepayment risk from PAC investors E. Companion classes create additional prepayment risk for PAC investors Q-12. If you had a CMO with 10% FRMs, and a tranche

Explanation / Answer

Q5. B 400,000

Principal in oater class = 0.5*20 m = 10 m

With the increased rate payment to oater class should be 9.5%*10 m = 950,000

However, maximum interest generated by the security = 4%*10m = 400,000

Hence payment to the floater class= Maximum interest generated = $400,000

Q8 D- Companion class investors absorb the prepayment risk from PAC investors.

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