HW 6
1. What security is similar to insurance?
A) Mortgage Backed Bond
B) Mortgage Pass-Through
C) Collateralized Mortgage Obliga on
D) Credit Default Swap
2. What is a risk that a CMBS investor faces that an agency MBS investor avoids?
A) Interest rate risk
B) Default risk
C) In(a on risk
D) Prepayment risk
Mortgage-backed securities: oaters and inverse oaters
3. BOA issues $400m in CMO. 50% of the issue is (oater tranche with index = LIBOR (currently 1%) and margin =
2%. The remaining 50% is inverse (oater tranche that is designed to keep the total cost of financing constant.
The next year LIBOR goes up to 3%. What would be the interest paid to the oater tranche investors? Enter
your answer in percent, but without percent sign. Hint: it’s a short ques on, not many calcula ons needed.
4. BOA issues $200m in CMO. 75% of the issue is (oater tranche with index = LIBOR (currently 6%) and margin =
1%. The remaining 25% is inverse (oater tranche that is designed to keep the total cost of 6nancing constant.
The next year LIBOR falls to 4%. What would be the interest paid to the inverse oater tranche investors? Enter
your answer in percent, but without percent sign.
Home equity and balloon
This ques on illustrates how having a balloon mortgage may lead to a nega ve equity that increases the risk of
default.
Ann would like to buy a house.
7. How much home equity will she have aAer 10 years (120 months)?
8. How much home equity will she have aAer 29 years (348 months)?