Question 4 A. AQF Bank Limited has a mortgage pool with principal of $25 million. The maturity is 25 years with a monthly mortgage payment of 8 percent per annum. The following sets of information are available regarding this mortgage pool: No prepayments. The mortgage-backed security insurance fee is 50 basis points and the servicing fee is 30 basis points. Assume that AQF Bank Limited wants to know after one year value of the mortgage pool and the pass- through security. If interest rates increase 200 basis points after one year, calculate: (0) The value of the mortgage pool after one year [2 marks] (ii) The value of the pass-through security after one year [2 marks] B. Write a short report to the Chief Risk Officer on how AQF Bank Limited can use securitisation to manage its risk exposures. Be sure to consider interest rate, currency, liquidity and credit risks. [4 marks] C. Assume that you are an official from APRA. In an orientation meeting with bank executives, one of the participants asks you why regulators are more concerned with the capital adequacy of banks compared to the capital holdings of a similar sized non-financial institution. Please briefly respond to this executive. [2 marks] Question 4 A. AQF Bank Limited has a mortgage pool with principal of $25 million. The maturity is 25 years with a monthly mortgage payment of 8 percent per annum. The following sets of information are available regarding this mortgage pool: No prepayments. The mortgage-backed security insurance fee is 50 basis points and the servicing fee is 30 basis points. Assume that AQF Bank Limited wants to know after one year value of the mortgage pool and the pass- through security. If interest rates increase 200 basis points after one year, calculate: (0) The value of the mortgage pool after one year [2 marks] (ii) The value of the pass-through security after one year [2 marks] B. Write a short report to the Chief Risk Officer on how AQF Bank Limited can use securitisation to manage its risk exposures. Be sure to consider interest rate, currency, liquidity and credit risks. [4 marks] C. Assume that you are an official from APRA. In an orientation meeting with bank executives, one of the participants asks you why regulators are more concerned with the capital adequacy of banks compared to the capital holdings of a similar sized non-financial institution. Please briefly respond to this executive. [2 marks]