Question

An underlying GNMA 15 year mortgage pool has a principal amount of $50 million and a yield of 6% per annum (paid monthly). Assuming no prepayments: What is the first monthly payment on the Principal Only (PO) strip?

Answer 1

Step 1:	Monthly payment
	EMI = [P x R x (1+R)^N]/[(1+R)^N-1]
	Where,
	EMI= Equal Monthly Payment
	P= Loan Amount
	R= Interest rate per period   =6%/12 =0.5%
	N= Number of periods =15*12 =180
	= [ $50000000x0.005 x (1+0.005)^180]/[(1+0.005)^180 -1]
	= [ $250000( 1.005 )^180] / [(1.005 )^180 -1
	=$421928.41
Step 2:	Interest charged for first month
	=$50000000*6%/12
	=$250000
Step 3:	first monthly payment on the Principal Only (PO) strip
	=$421928.41-250000
	$ 171,928.41
	Correct Answer =171928.41