Question

Consider an MPT that is backed by 50 mortgages with average balance of $400,000 and yearly payment. The MPT has a WAC = 6% and WAM = 15 years. There is no servicing fee on this security. Assuming there is no prepayment and market rate is 3%, how much should this security sell for?

Answer 1

Cash Flow is same for all 15 years, because there is nothing that investors pay or receive, i.e,

1). Prepayment; 2). Servicing Fee

First, we need to find the annual PMT, for that we need to put the following values in the financial calculator:

INPUT	15	6	50*400,000=20,000,000		0
TVM	N	I/Y	PV	PMT	FV
OUTPUT				-2,059,255.28

So, annual payment = $2,059,255.28

Now, We can compute NPV by putting the following values in the financial calculator:

INPUT	15	3		-2,059,255.28	0
TVM	N	I/Y	PV	PMT	FV
OUTPUT			24,583,255.86

So, Bond's Selling Price = $24,583,255.86