Question

Imagine that you have $10,000,000 of notional principal from which floater and inverse floater securities will be created. The underlying mortgages have a WAC of 5%. If the payment rule to the floater class is LIBOR+60bp and $6M is the principal balance allocated to the floater class, If LIBOR is currently at 10%, what is the payment to the floater class? Round to the nearest dollar. please show me all steps!

Answer 1

The pool generates: 10000000*0.05=$500,000 each period

If the floater class receives LIBOR+60bp and the LIBOR is currently at 10%,

therefore the floater class will receive $6000000*(0.106)=$636,000

We know that the LIBOR doesn’t exceed the maximum cap, Inverse floater will receive pool cash flow that doesn’t go to floater

500,000-636,000=(136,000) . We can not have a negative figure the company will have to generate additional revenues, even to compensate for 136000