Question

First Mortgage Bankers purchases a $100,000 Face value MBS carrying a coupon of 7.5 percent and a maturity of 30 years. The firm intends to strip the MBS into principal only (PO) and interest only (IO) strips and sell each strip separately to investors. Assume for the purpose of the following analysis, the MBS will make payments on an “ANNUAL BASIS.”

The annual payment on the MBS is $8,467.12

What will the MBS sell for in each of the following yield-survival scenarios?

Years Survived	Yield (%)
1	5.50
2	6.00
3	6.50
4	7.00
5	7.50
8	8.00

Answer 1

Answer:

Years Survived	Yeild (%)	MBS Sell
1	5.50	$       8,932.81
2	6.00	$       8,975.15
3	6.50	$       9,017.48
4	7.00	$       9,059.82
5	7.50	$       9,102.15
8	8.00	$       9,144.49

Based on the above evaluation it can be interpreted that the amount of MBS sell is obtained from the yeild % which is mentioned in the given question.

Workings:

MBS sell

Year 1 = $ (8467.12 * 105.5/100) = $ 8932.81.

Year 2 = $ (8467.12 * 106.0/100) = $ 8975.15.

Year 3 = $ (8467.12 * 106.5/100) = $ 9017.48.

Year 4 = $ (8467.12 * 107.0/100) = $ 9059.82.

Year 5 = $ (8467.12 * 107.5/100) = $ 9102.15.

Year 8 = $ (8467.12 * 108.0/100) = $ 9144.49.