Question

Question: (MBS) Suppose you own a mortgage pass-through security as described in Table1. Describe the influence of a decrease in mortgage rates on the total return of the mortgage backed security as compared to an otherwise identical plain vanilla bond. The following table assuming a prepayment rate of 140 PSA Original balance: $150,000,000 Pass-through rate: 7% WAM: 360 months Tablet SMM mortgage payment interest scheduled principal Pre-payment Total principal cash flow repayment repayment 0.023% $1,316,357.36 $875,000 $441,357.36 $34.941.88 $476,299.24 $1,351,299.24 month outstanding balance 1 $150,000,000 2 $148,648,700.76 0.047% $1,316,357.36 $867,117.42 $449,239.93 $69,337.90 $518,577.83 $1,385,695.25 3 $147,263,005.51 0.070% $1,316,357.36 $859,034.2 $457,323.16 $102,763.98 $560,087.14 $1,419,121.34