What is the average life of a pass-through, and what does it depend on?
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A measure commonly used to estimate the life of a pass-through is its average life. Consider a mortgage-back security guaranteed by Ginnie Mae, which is a fully modified pass-throughs. The average lifeof a mortgage-backed security is the average time to receipt of principal payments (scheduled principal payments and projected prepayments), weighted by the amount of principal expected. Mathematically, the average life is expressed as follows:
average life =
where T is the number of months. The average life of a pass-through depends on the PSA prepayment assumption.
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