Answer-first summary for fast verification
Answer: $4.414 million
**Correct answer: B. $4.414 million** We need: 1. **Scheduled principal** 2. **Prepaid principal** 3. **Pass-through interest** ### Step 1: Compute mortgage interest Pool balance = **$1.0 billion** WAC = **4.80%** Monthly interest on the mortgage pool: \[ 1{,}000{,}000{,}000 \times \frac{0.048}{12} = 4.0\text{ million} \] ### Step 2: Compute scheduled principal Total mortgage payment = **$5.247 million** Scheduled principal: \[ 5.247 - 4.0 = 1.247\text{ million} \] ### Step 3: Compute prepayment under 100% PSA At **month 1**, 100% PSA implies a very small CPR (0.2% annualized), so the expected prepayment is roughly **$166 thousand** on the remaining balance after scheduled principal. So total principal returned to investors is approximately: \[ 1.247 + 0.167 = 1.414\text{ million} \] ### Step 4: Compute pass-through interest Pass-through coupon = **3.60%** Monthly pass-through interest on the original $1.0 billion balance: \[ 1{,}000{,}000{,}000 \times \frac{0.036}{12} = 3.0\text{ million} \] ### Step 5: Total expected cash flow \[ 1.414 + 3.0 = 4.414\text{ million} \] Therefore, the total expected cash flow to the pass-through security is **$4.414 million**.
Author: Manit Arora
Ultimate access to all questions.
Q-106.3. A mortgage pool has a principal balance of $1.0 billion and the weighted average coupon (WAC) of the mortgages in the pool is 4.80%. In the first month, the coupon paid by the mortgage pool (i.e., principal plus interest) is $5.247 million. The pass-through security pays a coupon rate of 3.60%. The model's (expected) prepayment assumption is 100% PSA. On the first month, what is the total expected cash flow to the pass-through security? (hint: cash flow to PT security = scheduled principal + prepaid principal + pass-through interest)
A
$3.167 million
B
$4.414 million
C
$5.014 million
D
$5.247 million
No comments yet.