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3. Suppose you own an MBS pool with a coupon of 6%. Plot a graph of the value of the MBS (on the y-axis) against
3. Suppose you own an MBS pool with a coupon of 6%. Plot a graph of the value of the MBS (on the y-axis) against current market yields (on the x-axis - e.g. for a range of 2% to 10% ), under 3 different assumptions about the prepayment behavior of the borrowers in the pool: a. They exhibit typical prepayment behavior, as observed empirically. (Hint: this is what we saw in class in week 4.) b. They hardly ever prepay, and prepayments are not at all sensitive to interest rates. (E.g. the CPR is 2% no matter where current rates are.) c. They are perfectly efficient prepayment robots: all of them prepay as soon as yields drop below the coupon rate, and none of them prepay when yields are above the coupon rate. Note: we are not looking for a quantitatively exact graph; we would just like to see where the
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