Real Estate Finance Study Set 1

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Quiz 20 :

The Secondary Mortgage Market: Cmos and Derivative Securities

Quiz 20 :

The Secondary Mortgage Market: Cmos and Derivative Securities

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Excel. Refer to the "Ch20 CMO" tab in the Excel Workbook provided on the Web site. What is the return on the residual class for prepayment rates of 15 percent, 20 percent, 25 percent, and 30 percent
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Collateralize mortgage obligation (CMO) is a multifaceted debt security that directs the principal payments and interest payments from a mixed pool to different securities in order to satisfy the needs of an investor.
From the excel workbook on the provided website the return on the residual class are as below:
At a prepayment rate of 15%.
img img Hence, the return is
img at a prepayment rate of 15%.
At a prepayment rate of 20%.
img img Hence, the return is
img at a prepayment rate of 20%.
At a prepayment rate of 25%.
img img Hence, the return is
img at a prepayment rate of 25%.
At a prepayment rate of 30%.
img img Hence, the return is
img at a prepayment rate of 30%.

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What is the major difference between a CMO and the other types of mortgage-related securities
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Collateral mortgage obligation
Collateral mortgage obligation is bond security that is issued by backed by pool of different mortgages. Unlike the other principle mortgage security Collateral mortgage obligation is also backed by pool of mortgages. Level of risk in Collateral mortgage obligation is minimal compared to other type of mortgage backed security.
Major difference between Collateral mortgage obligation and other type of mortgage security is that Collateral mortgage obligation is issued in multiple classes against the similar pool of mortgagee.
Collateral mortgage obligation can have multiple maturity periods which is based on issuer as well as investors need. By issuing surety with different class and different maturity period the issuer can easily able to manage the cash flow and payment in Collateral mortgage obligation security.

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Are the overcollateralization requirements the same for mortgage pay-through bonds as for the mortgage-backed bonds
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Over collateralization means the pools of mortgages are more than the amount of securities issued against it. The mortgage pay through bonds (MPTBs) is issued against the mortgage pools and the cash flows from the pool are passed through to security holders.
Most of the pay through issues and mortgaged backed bonds are over collateralized since they are based on residential pools. The over collateralization are same in both the cases in the sense that (i) more mortgages in the pool than the sum of the securities issued against it. (ii) Additional collaterals in the form of U.S. government bonds or any other obligations from different agencies.

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Atlantis REIT expects an income of $8.00 per share. This includes a deduction of $2.00 per share for depreciation. Atlantis did not have any gains from the sale of real estate. Its properties are mainly apartments, and you believe that apartments are currently selling on average at about an 8 percent cap rate. Atlantis has 1 million shares outstanding and its balance sheet shows liabilities of $40 million. Comparable REITs have FFO multiples of about 10. Atlantis is expected to pay a dividend during the next fiscal year of $6.00 per share and to increase those dividends at about 2 percent per year in the future. Investors in REITs like Atlantis usually expect a return of about 12 percent. a. What is the FFO and value per share based on an FFO multiple b. What value per share is indicated using a dividend discount model c. What is the value per share implied by the net asset value of the properties
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An investor is considering the purchase of either an IO or PO strip from a CMO offering. The portion of the mortgage pool backing this tranche consists of $1,000,000 in mortgages with a remaining maturity of 10 years and an 8 percent interest rate. a. Assuming annual payments and a zero prepayment rate, prepare a schedule showing the IO and PO cash flows that would be payable to investors in this tranche. If the interest rate demanded by investors on this investment is also 8 percent, what would be the prices of the IO and PO strips b. If interest rates increased to 10 percent and prepayments remained at a zero rate, how would the price of the IO and PO strips change Which security, the IO or PO, exhibits the greatest price change from ( a ) Why c. Investor interest rates now decline to 6 percent. What is the price of the IO PO Prepayments now increase to a rate of 20 percent per year because mortgage borrowers in the pool begin to refinance at lower interest rates. What would prices for the IO and PO be now (Assume that the 20% prepayment received at the end of each year is based on the outstanding loan balances at the end of the preceding year.) Which security, the IO or PO, exhibits the greatest change in price when compared to ( a ) and ( b ) above Why What does this pattern suggest about the relative risk of each security
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Name the four major classes of mortgage-related securities. As an issuer, explain the reasons for choosing one type over another.
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Name two different ways that MPTBs can be overcollateralized.
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What is a mortgage pay-through bond (MPTB) How does it resemble a mortgage-backed bond (MBB) How does it differ
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What is the purpose of the accrual tranche Could a CMO exist without a Z class What would be the difference between the CMO with and without the accrual class
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What is meant by a derivative investment
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What is a CMO Explain why a CMO has been called as much of a marketing innovation as a financial innovation.
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Which tranches in a CMO issue are least subject to price variances related to changes in market interest rates Why
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The Provincial Insurance Company has the choice of investing $100,000 in either a mortgage bond with annual payments based on a 10-year amortization schedule with a maturity of five years at 10 percent or a 5-year corporate bond with annual interest payments and a final principal payment also yielding 10 percent. a. Find the duration of each instrument if they are issued at par. b. If the market rate of interest on each bond fell from 10 percent to 7 percent and the durations found in part ( a ) remained constant, what would be the new price for each bond
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What is the primary distinction between mortgage-related securities backed by residential mortgages and those backed by commercial mortgages
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Excel. Refer to the "Ch20 CMBS" tab in the Excel Workbook provided on the Web site. Suppose there is default at maturity and the property sells for 90 percent of the loan balance. What are the returns to the subordinate tranche and residual
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Excel. Refer to the "Ch20 Floater" tab in the Excel Workbook provided on the Web site. Assume that $15,000,000 in floaters and $5,000,000 in inverse floaters are issued. How does this change the returns for the inverse floater when LIBOR is 2 percent, 4 percent, and 6 percent
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You have been presented with the following set of financial statements for National Property Trust, a REIT that is about to make an initial stock offering to the public. This REIT specializes in the acquisition and management of warehouses. Your firm, Blue Street Advisors, is an investment management company that is considering the purchase of National Property Trust shares. You have been asked to prepare a financial analysis of the REIT. img a. Develop a set of financial ratios that will provide Blue Street Advisors with useful information in the evaluation and comparison of National Property Trust with other REITs. b. Your research also indicates that the shares of comparable REITs specializing in warehouse acquisitions in the same regions are selling at dividend yields in the range of 8 percent. Price multiples for these REITs are about 12 current FFO. What price range does this suggest for National shares What does this price range imply about the amount of dividend that National would have to pay to be in line with comparable REITs c. What is the NAV for National Property Trust assuming that a blended capitalization rate of 10 percent would be applicable for the properties owned by Blue Street Advisors
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Why are CMOs overcollateralized
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Excel. Refer to the "CH20 IO_PO" tab in the Excel Workbook provided on the Web site. What is the return on the IO and PO at prepayment rates of 25 percent and 30 percent
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Name the major types of credit enhancement used for commercial-backed mortgage securities.
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