Question

1. If a mortgage pool consists of five 10% FRMs totaling $500,000, five 9% FRMs totaling $450,000, and ten 8% FRMs totaling $750,000, what is the weighted average coupon (WAC) rate?

(A) 8.75%

(B) 8.85%

(C) 9.00%

(D) None of the above

Solution

WAC Rate = w1*x1 + w2*x2 + w3*x3 + ...........+wn*xn

WAC rate = (10*0.5+ 9*0.45 + 8*0.75) / 1.7= 8.85

Why are we dividing by 1.7 when it is not given on the question? Please explain

Answer 1

We are dividing by 1.7 because this is the total amount of mortgage in millions. $500,000 + $450,000 + $750,000 = $1,700,000 or 1.7 million.

In the numerator you have the figures in millions, so you just divide by 1.7

WAC stands for weighted average coupon. When you take the average you divide by the sum.

Can you please upvote? Thank You :-)