The Home Loan Corp, Inc (HLC) originates a pool containing 100 five year mortgages, with an average balance of $150,000 each. All mortgages in the pool carry a fixed interest rate of 6%. HLC now wishes to sell the pool of mortgages to the FHLMC. Assuming prepayments are constant at 10%, what is the price of the pool of mortgages if the FHLMC wishes to obtain a rate of return equal to 7%?

Fin problem – the home loan corp, inc (hlc)

To calculate the value of the mortgage pool, you must first determine its current value. Assuming a prepayment of 10% annually, the balance of all mortgages would total $15 million. This would mean an annual average amount of principal of $1.5million ($15 million multiplied by 0.10). Given that the FHLMC wishes to obtain a return rate equal to 7%, then the price for this mortgage pool can be calculated using the formula: PV = PMT*(((1+r)^n-1)/(r*(1+r)^n)), where PV is the present value, PMT is the annual payment (in this case $1.5 million), r is the required interest rate (7%) and n is number of years (5). This calculation results in a present value for HLC’s mortgage pool equal to $11.09 million.