# Tag Info

6

I can't speak for all structured products but valuing a MBS is straight-forward, but not easy. It's straight-forward because you just need to calculate the net present value of the discounted cash flows. That said, accurately determining those cash flows is hard. The most difficult cash flows to determine--prepayments and defaults/severity--also have the ...

6

SMM stands for single-month mortality and CPR stands for constant (or conditional) prepayment rate. They're both units of voluntary prepayment rates ($CPR = 1-(1-SMM)^{12}$). They could be based on either estimated or actual prepayments. Where to get actual MBS prepayment data will depend on what type(s) of MBS pools you're modeling (e.g. agency, ...

5

Pre-payment rates are difficult to forecast because of path dependency. The historical interest rate path - not just current market conditions and borrower characteristics - matters because borrowers may have exercised their right to call the mortgage bond and re-finance if rates had previously been at lower levels than the current rate. None on the ...

4

You don't say which duration, but it's generally okay to use effective duration: $$duration (eff) = \frac{-1}{P(r)}*\frac{Price(r+b) - Price(r-b)}{2*b}$$ where $r$ = rate and $b$ = yield shock. Although, to address Brian's point, the mortgage contains an embedded call option that creates negative convexity, so the three re-pricings, $P(r)$, $P(r+b)$, \$...

2

Here are some general contributing factors. I could be more specific, but you haven't given specifics about which Freddie, 30-year, 4% MBS price you are quoting. I'm going to assume it's the front-month TBA price. I'm also going to assume the 4.39% rate is the PMMS rate. The PMMS is the primary market rate (what the borrower pays). The investor doesn't ...

2

Mortgage backed securities are valued by calculating the net present value (NPV) of cash flows they are expected to generate. These cash flows are predicted using a model that incorporates all the contractual characteristics of the security and the underlying loans, as well as assumptions on things like prepayment speed, default speed, loss severity, and ...

2

The framework for valuing structured finance products in general is based on the nature of the cashflows in the product. Decompose the constituent components of the structure. Make some choices about handling the correlations between assets in the structure. Review the covenants of the structure and their impact on the cashflows (sequence of events). ...

1

I would recommend the following text: Mortgage-Backed Securities: Products, Structuring, and Analytical Techniques, 2nd Edition - Frank Fabozzi. Part II: Prepayment and Default Metrics and Behavior covers the topics you mentioned, and I have been using it recently as a basis for making models based on agency MBS products. This introduces the 100 PSA ...

1

Assuming the underlying mortgages that have been pooled into a Mortgage-Backed Security (MBS) are freely prepayable, the notional of the interest swap is unknown at inception. Therefore, you have two options - estimate a notional schedule to the best of your ability assuming some future evolution of interest rates (which are an important driver of ...

1

I am not familiar with any formal "models" of the TBA coupon stack similar to Nelson-Siegel, but we typically compare the TOAS and ZV (Z-spread) curves as a function of coupon and issuer/maturity. We also examine relative value between these curves and various seasoned loan pools. The curve itself is very erratic, and plotting it often gives a good ...

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