Skip to content

FRM Part I · FRM Exam Part I · Mortgages and Mortgage-Backed Securities

An agency pass-through pool has a scheduled balance of $200 million at the start of the month. The weighted average coupon (WAC) of the underlying mortgages is 6.00% and the combined servicing and guarantee fee is 0.50% per year. Ignoring any principal payments, what is the interest passed through to investors for the month?

Investors receive interest at the net pass-through rate, which is the 6.00% WAC less the 0.50% fee, or 5.50%. On $200 million this is $916,667 per month. Using the gross 6.00% WAC would overstate the amount by including servicing and guarantee fees.

  1. A$916,667Correct
  2. B$1,000,000
  3. C$83,333
  4. D$458,333

Explanation

The pass-through rate is 6.00% - 0.50% = 5.50%. Monthly interest to investors = $200,000,000 x 5.50% / 12 = $916,667. Using the 6.00% WAC gives $1,000,000, which wrongly includes the servicing and guarantee fee.

Did you get it right without looking?

One question tells you little. A timed set on Mortgages and Mortgage-Backed Securities shows your real accuracy, how long you take and where you lose marks.

Practise Mortgages and Mortgage-Backed SecuritiesFree diagnostic mock

More Mortgages and Mortgage-Backed Securities questions