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Seller Swap One party sells mortgage pools on its balance sheet and pays the bond interest by entering into a pay-fixed swap with CHT, and receives the interest from MBS pool sold to CHT. This is a seller swap. The fixed leg is semi annual, and the float leg, MBS coupons, is monthly. In addition, the MBS sold to the trust generates principal cash flows. CHT buys new-pooled mortgages from the party with this principal flows every month until the maturity of the swap. CHT sold bullet bonds of total notional N that pays C% semi annual coupon for 60 months to investors for P dollars. Using these proceedings, CHT bought a mortgage pool, whose dollar price was P, from the party and entered into a “seller swap” with the party. CHT will buy new mortgage pools from the principal payments generated from the mortgage pools that already bought from the party The party agreed to pay CHT the coupon of the bond, dollars every six months for 5 years. On the floating side, CHT agreed to pay, monthly, all the coupons generated by the mortgage pools it bought from the party for 60 months. We show that the time t value of the float- leg is equal to the sum of time t dollar prices of the mortgages the party sold to CHT less expected discounted value of mortgages at the maturity of the swap.
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