Mathematics Homework Help

Only bid if you can guarentee correct answers please. I need the work to be right. Thank you.

Submission instructions: compute and handwrite solutions submit all work/setup which calculations

1a-c.
Suppose we have a new type of MBS to accommodate the short-term
investor. This new MBS security instrument contains only 5-year
mortgages (in reality are rare if non-existent). ACME, a private
secondary mortgage market, has pooled together ten $100,000 5-year
mortgage loans. Note: To save space in writing out your work, you can scale the ten $100,000 to $100.

Calculate the duration for this MBS pool assuming annual compounding for three years at 10 percent interest which

a.is a “zero coupon”

b. is an interest-only MBS.

c. is fully amortizable over the five years.

Now assume that the interest-only MBS in problem 2b. is prepayable (butnot defaultable). Use the option-theoretic model to price this MBS.

Interest rates have a 50% chance of going up 1% each year and a 50%

chance of going down 1% each year. From your results, qualitatively

compare the MBS value without prepayment to the MBS value with

prepayment. Note: To save space in writing out your work, you can scale the ten $100,000 to $100. – in your solution show the work/setup which includes the calculations for all steps in Slide 17’s Option Pricing