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Chapter 10 – MortgageBacked Securities
1.
A mortgage is a loan that is collateralized with a specific piece of real property,
residential or commercial.
2.
Cash flow characteristic of a fixed rate, level payment, fully amortized loan
3.
Concept of prepayments and how they result in prepayment risk
4.
Investment characteristics of a mortgage passthrough security – concept of
pooling several mortgages to create a “pool” and selling it to investors.
Securitization is done by GNMA, FNMA and FHLMC
5.
Importance of prepayments in estimating cash flow of a mortgage security
6.
Compare and contrast the CPR (Constant prepayment rate) to the PSA (Public
Securities Association).
CPR – is the annual rate ex. 12 CPR or 12% per annum
of the outstanding is paid off or 1% monthly. A monthly rate is computed by the
formula: SMM = 1 – (1CPR)
^ (1/12)
7.
Mathematically, 100 PSA can be expressed as follows:
1.
If t, is the number of months since the mortgage was originated,
2.
It t< 30 then CPR = 6% (t/30) and if t>= 30 then CPR=6%
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 Spring '10
 Liasa

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