Download Understanding the Impact of Interest Rates and Prepayments on Real Estate Finance - Prof. and more Assignments Real Estate Management in PDF only on Docsity! 1 RE 611 / Fin 611 â Real Estate Finance Homework 10 â Secondary Mortgage Market Securities Dr. Stanley D. Longhofer 1) Suppose that a pass-through security is issued at par. a) Explain briefly what will happen to the value of the pass-through if market interest rates rise. Make sure you explain the direct (discount rate) effect and the indirect (prepayment rate) effect. What is the total impact on the securityâs value? b) What will happen to the value of the pass-through if market interest rates fall? Once again, explain both the direct and indirect effects, along with the total effect. 2) Download the RE611_Pass-throughs.xls spreadsheet (found in the Downloads section of the website). The default entries should be $100,000 average loan size, 10 loans in pool, 10-year term for loans, 10.00% interest rate on loans in pool, 40 pass-through securities, 9.50% coupon rate on pass-throughs, 0% prepayment rate (fixed rate = 1), and a 10% discount rate. a) What is the value of each pass-through security under these default inputs? Is this a premium or discount pass-through? b) What happens to the value of the pass-through if prepayments are 10% per year? Explain why the value is different than in part (a) and why it moved in the direction it did. 3) Download the RE611_Mortgage_Backed_Bonds.xls spreadsheet from the class website. The default inputs are $100,000,000 pool size, 30-year term, 8.00% interest, $80,000,000 face value of bonds, 7.00% coupon rate on bonds, 20-year maturity for bonds, 0.05% default rate, 0.00% prepayment rate, 6.00% sinking fund return, and 7.00% issuerâs required return. The par value of each bond is $10,000. a) Suppose that investors require a 6.50 percent return on these bonds when they are issued. What will be the price of these bonds? b) Two years after they are issued, the bonds are priced at $9,500. What is the yield to maturity on these bonds? c) Suppose that the prepayments are 100% PSA. What is the NPV of the issuerâs equity investment? d) Suppose that market interest rates fall by 100 basis points; this lowers both the sinking fund rate of return and the issuerâs required return. As a result of this fall in market rates, suppose that prepayments speed up to 125% PSA. What happens to the NPV of the issuerâs equity investment? Explain why this occurs taking into account both the direct and indirect effects. (Hint: You might try change just the sinking fund return and the issuerâs require return first, and then add in the change to prepayments.) e) Will the value of the bonds be affected by changes in prepayments? Why or why not?
