Question

A pool of mortgages contains 3.75%, 30-year loans with the total beginning balance of $100 million. The pool backs 139 principal-only (PO) shares and 137 interest-only (IO) shares. Monthly expenses and fees amount to 0.04% of the beginning-of-the-month balance (they are subtracted from the interest portion). In the first month, the total payments from the pool were $482.2 thousand. What was the cash flow per IO share (to the nearest dollar)? Assume no defaults.

Answer 1

Mortgage Interest Rate = 3.75 %, Mortgage Tenure = 30 years or (30 x 12) = 360 months, Beginning Balance = $ 100 million

Monthly Expense and Fees = 0.04 % of Beginning Balance

Monthly Interest Rate = (3.75/12) = 0.3125 %

First Month Payout = $ 482.2 thousand = 482.2 x 1000 = $ 482200

First Month Interest Expense = Beginning Balance x Interest Rate = 1000000 x 0.003125 = $ 3125

First Month Expense and Fees = 0.0004 x 1000000 = $ 400

Net Payout to IO Shares = First Month Interest Expense - First Month Expense and Fees = 3125 - 400 = $ 2725

Number of IO Shares Outstanding = 137

Therefore, Cash Flow per IO Share = 2725 / 137 = $ 19.89