Indicate whether you agree or disagree with the following statement: "The PSA prepayment benchmark is a model for forecasting prepayments for a pass-through security."
What will be an ideal response?
The Public Securities Association (PSA) prepayment benchmark is expressed as a monthly series of annual prepayment rates. This benchmark is commonly referred to as a prepayment model, suggesting that it can be used to estimate prepayments. Characterization of this benchmark as a prepayment model is inappropriate. It is simply a market convention of prepayment behavior. The PSA benchmark assumes that prepayment rates are low for newly originated mortgages and then will speed up as the mortgages become seasoned.
The PSA benchmark assumes the following CPRs for 30-year mortgages: (i) a CPR of 0.2% for the first month, increased by 0.2% per year per month for the next 30 months when it reaches 6% per year, and (ii) a 6% CPR for the remaining years. This benchmark, referred to as "100% PSA" or simply "100 PSA," can be depicted graphically. Mathematically, 100 PSA can be expressed as follows:
If t ≤ 30: CPR = 6% (t / 30)
If t > 30: CPR = 6%
where t is the number of months since the mortgage originated.
You might also like to view...
Establish the size, scale, and orientation of _____________ in a photograph
a. the frame b. the objects c. the light d. the text
What of the following is a drawback of cloud computing?
A) It delivers computing as a product rather than a service. B) Data protection laws are not uniform across countries. C) Resources are difficult to share because information is maintained on a protected server. D) It provides computation that requires end-user knowledge of the physical location and configuration of the system that delivers services.