Explanation:
Proceeds from selling the June 10 TBA are:
$10m × (104.20 + 0.160)/100 = $10,436,000
Investing these proceeds to July 10 at 1.5% interest earns interest of:
$10,436,000 × 30/360 × 1.5% = $13,045
Purchasing the July 10 TBA, which has experienced a 2% paydown, will cost:
$10m × (1 − 2%) × (103.0 + 0.160)/100 = $10,109,680
Net proceeds from the roll therefore are:
$10,436,000 + $13,045 − $10,109,680 = $339,365
If the investor does not roll, the net proceeds are the coupon plus principal payoff:
$10m × (5%/12 + 2%) = $241,667
Value of the roll = net proceeds from the roll − net proceeds without roll:
= $339,365 − $241,667 = $97,698
Q.3459 TBA prices of the Freddie Mac 5% for June 10 and July settlements are $104.20 and $103.00, respectively. The accrued interest to be added to each of these prices is $0.160. The expected total principal payoff (scheduled principal plus prepayments) is 2% of the outstanding balance and the prevailing short-term rate is 1.5%. Also, assume that the actual/360-day convention is applied. An investor wishes to roll a balance of $10 million. Determine the value of the roll.
A
$436,000
B
$13,045
C
$109,680
D
$97,698
No comments yet.