Home to Canadians
by Professor Ian H. Giddy
New York University
early December 2004. Your employer, the Canada Mortgage and Housing
Corporation, is about to purchase a $1 billion pool of mortgage loans
from several banks in Ontario. Your team has been placed in charge of
the funding and risk management of this pool. The
goal is to issue a conventional bond that will appeal to investors, in
such a way as to closely match the interest rate risk characteristics
of pool. The details of the pool, simplified for computational
purposes, are shown below.
|Pool total||C$1000 million|
|Pool interest rate|
|Pool maturity date||10 years|
|Equal-payment amortizing loans
|Principal amortization period
|Pool payment frequency|
|Assumed annual principal prepayment
The following chart illustrates the paydown structure of the loan pool.
Your task is to manage the interest rate risk of the mortgage loan pool.
First, you will recommend a bond that could be issued to fund the pool.
The bond must be a fixed coupon, bullet maturity noncallable bond. You
may use this spreadsheet: loan_amortization.xls
Next, assume that the pool is funded with part of the 3.75% Canada Housing
Trust bond issued December 15, 2004 and maturing March 15, 2010. A summary of the bond's terms may
be found here: canada_mortgage_bond.pdf. What is the duration mismatch between the asset and
Finally, recommend a hedging program that minimizes the CMHC's interest rate
risk. How could CMHC reduce the duration mismatch by using
- Use this spreadsheet: portfolio_duration.xls