AndyNZ

Thanks 1Recho! It’s option 2.
However I’m not sure if it’s interest based on the principal at the beginning of the quarter or of that month. Which one is common practice, do you know?
Also, what is the appropriate discount rate to discount the payments? Is it LIBOR of the same maturity, if the mortgage is assumed to be riskless?
However, I wonder if the mortgage is truly riskless and LIBOR was 3% let’s say. Then why would the bank choose a high coupon of 10%? I’d imagine they would choose a coupon such that the mortgage is at par, no?
Thanks!