ECOM049 - Commercial & Investment Banking

Multiple Choice Questions

One hundred identical mortgages are pooled together into a pass-through security. Each mortgage has a $150,000 principal, a fixed annual interest rate of 8 percent (paid monthly), and is fully amortized over a term of 30 years. What is the weighted average life of the above mortgage pool?

A. 30 years.

B. 2 months.

C. 1.998 months.

D. 1 month.

E. 1.5 months.

Multiple Choice Questions

One hundred identical mortgages are pooled together into a pass-through security. Each mortgage has a $150,000 principal, a fixed annual interest rate of 8 percent (paid monthly), and is fully amortized over a term of 30 years. What is the monthly payment on the mortgage pass-through if a 44-basis point servicing fee is deducted monthly?

A. $105,499.

B. $114,700.

C. $11,340.

D. $1,055.

E. $1,277,494.

Multiple Choice Questions

The following information is for a collateralized mortgage obligation (CMO). Tranche A has a face value of $110 million and pays 5 percent annually. Tranche B has a face value of $90 million and pays 7 percent annually. What are the annual coupon payments promised to each tranche? (Assume no prepayments and non-amortization of principal.)

A. $5.5 million on Tranche A and $6.3 million on Tranche B.

B. $5.5 million on Tranche B and $6.3 million on Tranche A.

C. A total of $12 million on both Tranche A and B.

D. $4.5 million on Tranche A and $7.7 million on Tranche B.

E. $4.5 million on Tranche B and $7.7 million on Tranche A.

Multiple Choice Questions

The underlying USA’s Government National Mortgage Association 15-year mortgage pool has a principal amount of $50 million and an annual yield of 6 percent (paid monthly). Assume that there are no prepayments. What is the first monthly payment on the Interest Only (IO) strip?

A. $3,000,000.

B. $421,928.

C. $250,000.

D. $299,775.

E. $171,928.

Multiple Choice Questions

Overseas bank is pooling 50 similar and fully amortized mortgages into a pass-through security. The face value of each mortgage is $100,000 paying 180 monthly interest and principal payments at a fixed rate of 9 percent per annum. What is the monthly payment on the mortgage pass-through?

A. $37,500.

B. $45,231.

C. $45,309.

D. $50,713.

E. $55,256.

Question

An FI originates a pool of 500 30-year mortgages, each averaging $150,000 with an annual mortgage coupon rate of 8 percent. Assume that the US’ Government National Mortgage Association (GNMA) credit risk insurance fee is 6 basis points and that the FI's servicing fee is 19 basis points.

a. What is the present value of the mortgage pool? [3 marks]

b. What is the monthly mortgage payment? [3 marks]

c. For the first two payments, what portion is interest and what portion is principal repayment? [3 marks]

d. What are the expected monthly cash flows to GNMA bondholders? [3 marks]

e. What is the present value of the GNMA pass-through bonds? Assume that the risk- adjusted market annual rate of return is 8 percent compounded monthly. [3 marks]

f. Would actual cash flows to GNMA bondholders deviate from expected cash flows as in part (d)? Why or why not? [3 marks]

g. What are the expected monthly cash flows for the FI and GNMA? [2 marks]

Question

Consider a GNMA mortgage pool with principal of $20 million. The maturity is 30 years with a monthly mortgage payment of 10 percent per year. Assume no prepayments.

a. What is the monthly mortgage payment (100 percent amortizing) on the pool of mortgages? [3 marks]

b. If the GNMA insurance fee is 6 basis points and the servicing fee is 44 basis points, what is the yield on the GNMA pass-through? [3 marks]

c. What is the monthly payment on the GNMA in part (b)? [3 marks]

d. Calculate the first monthly servicing fee paid to the originating FIs. [3 marks]

e. Calculate the first monthly insurance fee paid to GNMA. [3 marks]

Given, now, that there are no prepayments and calculate the value of (f) the mortgage pool and (g) the GNMA pass-through assuming market interest rates increase 50 basis points.

f. The mortgage pool's value, PV, is … [3 marks]

g. The GNMA's value, PV, is … [2 marks]

Question

Discuss the advantages and disadvantages of the deposit insurance for the banking industry. [20 marks]

Question

Discuss the benefits and costs of securitisation. [20 marks]