1. Suppose that an investor owns a pass-through in which the remaining mortgage
ID: 2795162 • Letter: 1
Question
1. Suppose that an investor owns a pass-through in which the remaining mortgage balances at the beginning of some month is $100 million. Assuming that the SMM is 0.69244% and the scheduled principal payment is $1 million, the estimated prepayment for the month is:
$685,515.60
$616,270.05
$692,440.00
$68.551,560.00
Consider the following 2-year Credit Default Swap:
The probability of a default during any given year (conditional on no default during previous years) is 3%, so CDP = 3%.
The risk-free rate (LIBOR) is 5% per year
The recovery rate is R = 30%
The CDS buyer gets 70% of face value if a default occurs
What is the present value of the expected premiums from the CDS?
0.9700s
0.9409s
1.777s
1.911s
2. Using the information from the previous question, find the present value of the expected payoffs
0.0210
0.0204
0.0414
None of the above
Explanation / Answer
As per the chegg's policy I am allowed to answer only the first question so please don't mind and ask other questions separately.
Prepayment for the month = SMM*(Balance at the beginning of month - Scheduled payment)
= 0.0069244*(100000000-1000000)
= 616270.05
Option B is correct.
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