Real Estate Finance Study Set 1

Business

Quiz 19 :
The Secondary Mortgage Market

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Quiz 19 :
The Secondary Mortgage Market

Mortgage-backed bonds (MBB): Mortgage backed bond (MBB) is a type of security that is backed by an asset. It means if the issuer fails to make periodic payment of interest, then bond holder can get their money by forcing company to sell that asset. Zero-Coupon Bond: It is a financial instrument which is traded at discount and don not render any interest payments to the bond holder. It is traded at less than its face value with yielding any periodic payments of interest. And thus, zero coupon bond generates yield at its maturity. a. Computation of initial price of each bond: Initial price of coupon bond is can be computed with the help of principal amount, coupon rate, investor's interest rate and the term of bond. For Annual Coupon Bond: Principal amount is img , coupon rate is img , investor's interest rate is img , and term period of bond is img years. Calculation of initial price of bond is given in below excel. img Fig (1) The resultant figure from the excel sheet is given below. img Fig (2) Hence, the initial price of annual coupon bond is img . For Zero Coupon Bond: Principal amount is img , coupon rate is img , investor's interest rate is img , and term period of bond is img years. Calculation of initial price of bond is given in below excel. img Fig (3) The resultant figure from the excel sheet is given below. img Fig (4) Hence, the initial price of annual coupon bond is img . b. Computation of initial price of each bond compounded semi-annually: Initial price of coupon bond is can be computed with the help of principal amount, coupon rate, investor's interest rate and the term of bond. For Semi-annual Coupon Bond: Principal amount is img , coupon rate is img , investor's interest rate is img , and term period of bond is img years. Calculation of initial price of bond is given in below excel. img Fig (5) The resultant figure from the excel sheet is given below. img Fig (6) Hence, the initial price of semi-annual coupon bond is img . For Zero Coupon Bond: Principal amount is img , coupon rate is img , investor's interest rate is img , and term period of bond is img years. Calculation of initial price of bond is given in below excel. img Fig (7) The resultant figure from the excel sheet is given below. img Fig (8) Hence, the initial price of semi-annual coupon bond is img . c. Computation of initial price of each bond at the end of fifth year: Initial price of coupon bond is can be computed with the help of principal amount, coupon rate, investor's interest rate and the term of bond. For Annual Coupon Bond: Principal amount is img , coupon rate is img , market interest rate is img , and term period of bond is img years img . Calculation of initial price of bond is given in below excel. img Fig (1) The resultant figure from the excel sheet is given below. img Fig (2) Hence, the initial price of annual coupon bond at the end of fifth year is img and in percentage it is img . For Zero Coupon Bond: Principal amount is img , coupon rate is img , market interest rate is img , and term period of bond is img years img . Calculation of initial price of bond is given in below excel. img Fig (3) The resultant figure from the excel sheet is given below. img Fig (4) Hence, the initial price of annual zero-coupon bond at the end of fifth year is img and in percentage it is img .

Banks disburse loan by keeping mortgage of assets. If the borrower does not or fails to repay the loan amount, then bank sell the mortgage in the secondary market. A secondary mortgage market is where the mortgages are sold and resold. Three reasons why the secondary mortgage market is important because: 1. The banks could sell the mortgages to recover their funds which they can use give new loans. 2. It would help in smooth flow of funds geographically. 3. It is another investment avenue for the individuals and institutions.

a. Compute value of security to issuer and individual investor at given market interest rates. Use spreadsheet for the required computation. Enter given values and formulas in the spreadsheet as shown in the image below. Answers are highlighted in 'Orange'. img Image - A.1 Obtained results are shown below. img Image - A.2 Answers are provided below. img b. This change would not affect the results provided in Image - A.2. It is evident from the Image - A.2, that in the year-5 price to Green and pol factor are img and img respectively. c. Compute value of security to issuer and individual investor at given market interest rates. Enter given values and formulas in the spreadsheet as shown in the image below. Answers are highlighted in 'Orange'. img Image - A.3 img Image - A.4 Thus, the price to Green and individual investors are img and img respectively. d. Compute value of security to issuer and individual investor at given market interest rates. Enter given values and formulas in the spreadsheet as shown in the image below. Answers are highlighted in 'Orange'. img Image - A.5 img Image - A.6 Thus, the price to Green and individual investors are img and img respectively.

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