Overseas bank is pooling 50 similar and fully amortized mortgages into a pass-through security.The face value of each mortgage is $100,000 paying 180 monthly interest and principal payments at a fixed rate of 9 percent per annum. If the entire mortgage pool is repaid at the end of the second month, what is the weighted average life of the mortgage pool?
A)2.10 months.
B)2 months.
C)1.997 months.
D)1.95 months.
E)1.90 months.

Question

Quizplus · Accepted Answer

The weighted average life (WAL) is calculated by considering the time each dollar of principal is outstanding. Since the entire mortgage pool is repaid at the end of the second month, the WAL is slightly less than 2 months due to the amortization of principal in the first two months. The correct calculation results in a WAL of approximately 1.997 months.

Overseas Bank Is Pooling 50 Similar and Fully Amortized Mortgages