Explanation:
First, find the total principal: Total Principal = USD 200,000 + USD 300,000 + USD 400,000 = USD 900,000.
Calculate the weight of each mortgage in the pool: w1 = 200,000 / 900,000 = 2/9 = 0.2222 w2 = 300,000 / 900,000 = 3/9 = 0.3333 w3 = 400,000 / 900,000 = 4/9 = 0.4444
Calculate the Weighted Average Coupon (WAC): WAC = (0.2222 × 3%) + (0.3333 × 4%) + (0.4444 × 5%) WAC = 0.6666% + 1.3333% + 2.2222% = 4.2222% (approx 4.22%)
Calculate the Weighted Average Maturity (WAM): WAM = (0.2222 × 220) + (0.3333 × 250) + (0.4444 × 150) WAM = 48.888 + 83.333 + 66.666 = 198.888 months (approx 198.89)
Therefore, WAC = 4.22% and WAM = 198.89.
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Q.28 A pool of mortgages owned by Bank Y consists of the following assets: i. USD 200,000 mortgage with 220 months to maturity and a 3% rate of interest ii. USD 300,000 mortgage with 250 months to maturity and a 4% rate of interest iii. USD 400,000 mortgage with 150 months to maturity and a 5% rate of interest
Determine the WAC and WAM.
A
WAC=4.22%; WAM=198.89
B
WAC=4.00%; WAM=206.67
C
WAC=4.22%; WAM=206.67
D
WAC=4.00%; WAM=198.89