Question
Assume the following characteristics of an MBS: Principal = $700 million WAM = 240 months (20 years) WAC = 8.2% Flat yield curve with r(0,T)
Assume the following characteristics of an MBS: Principal = $700 million WAM = 240 months (20 years) WAC = 8.2% Flat yield curve with r(0,T) = 4.5% Price the MBS as a straight passthrough assuming a PSA of 160% and a passthrough rate of 8%. a. Calculate the effective duration and convexity of this MBS for a 20 basis point change in rate and PSA of 250% at rdr and 70% at r+dr. Now assume that the MBS is divided into a PAC as the following: Tranche A Tranche B Tranche C Companion Tranche D PSA(high) = 250% PSA(low) = 90% b. Price each tranche as part of a PAC described above using the same yield curve as before.
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