Consider an MPT created from t
Consider an MPT created from the following pool of loans:
| Number of Loans | Principal | Rate | Maturity | |
| Group 1 | 50 | $200,000 | 5% | 30 years |
| Group 2 | 100 | $100,000 | 4% | 15 years |
Which of the following statements is FALSE?
| A. |
At issuance, WAC of this security is 4.5% |
|
| B. |
As mortgages in this pool become more seasoned, WAC will goup |
|
| C. |
At issuance, WAM of this security is 22.5 years |
|
| D. |
As mortgages in this pool become more seasoned, WAM will goup |
|
| E. |
At issuance, both groups have equal share in total poolbalance |
Answer:
| Number of Loans | Principal | Rate | Maturity | |
| Group 1 | 50 | $ 200,000 | 5% | 30years |
| Group 2 | 100 | $ 100,000 | 4% | 15 years |
Let us first calculate the total pool balance , which is the sumproduct of the number of loans and principal,
So Group 1 pool balance =50*200,000 = 10,000,000
and Group 2 pool balance = 100*100,000 = 10,000,000
One can see that both groups have equal share in total poolbalance, so Option E is clearly true
The WAM and WAC are calculated as follows:-
WAM = Group 1 pool balance* Maturity of Group 1 + Group 2 poolbalance /(Total pool balance)
=10,000,000*30+ 10,000,000*15 /(20,000,000) =22.5 years
WAC= Group1 pool balance*Rate + Group 2 pool balance*Rate/(Totalpool balance)
=10,000,000*5% + 10,000,000*4%/(20,000,000) = 4.5%
Option A and C are also true as per our calculations.
Seasonng refers to the passage of time associated wth a securitywhile being traded on the market.
So, the maturity of each of the mortgage securities s bound togo down as it will get closer to maturity as the securities getmore seasoned. So, WAM falls down due to reduction in maturity.
Option D is false as WAM should go down and not goup.
WAC may remain the same due to seasoning generally unless thereare drastic changes to the yield due to convergence.
"Our Prices Start at $11.99. As Our First Client, Use Coupon Code GET15 to claim 15% Discount This Month!!"
