Question
You have some MBS pass-through securities with a par value of $300 million and a par rate of 6.5%. The weighted average maturity (WAM) of
You have some MBS pass-through securities with a par value of $300 million and a par rate of 6.5%. The weighted average maturity (WAM) of the mortgage pool is 6 months and the weighted average coupon (WAC) is 7.00%. The continuously compounded interest rate is fixed at 5% over all maturities.
1. If PSA increases to 300% when interest rates fall by 50 bps and PSA decreases to 100% when interest rates rise by 50 bps, what is the effective duration of the pass-through securities?
2. If PSA increases to 300% when interest rates fall by 50 bps and PSA decreases to 100% when interest rates rise by 50 bps, what is the effective convexity of that pass-through securities?
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