1. The Yellow S & L originated a pool containing 50 five-year fixed interest rate mortgages with an average balance of $100,000 each. All mortgages in the pool carry a coupon of 10%. (For simplicity, assume that all mortgage payments are made annually at 10% interest.) Assuming a constant annual prepayment rate of 10% (for simplicity, assume that prepayments are based on the pool balance at the end of the preceding year and begin at the end of year 1).
Assume that one year has passed since the mortgage pool created, what will the pool factor be? (Choose the nearest value)
a. 0.64
b. 0.74
c. 0.94
d. 0.84
2. A 25-year maturity mortgage-backed bond is issued. The bond has a par value of $10,000 and promises to pay an 12 percent annual coupon. At issue, bond market investors require a 12 percent interest rate on the bond. What is the initial price on the bond?
a. $9,863
b. $10,000
c. $10,270
d. $8,835