Suppose there is a $400 million mortgage pass-through security with a 7.5% pass-through rate, a weighted average coupon of 8.125% and a weighted average maturity of 357 months, how to compute the cash flows for the next two months assuming a 100 Principal Securities Association(PSA)?

I am quite confused as to whether I have to use the single monthly mortality rate or the conditional prepayment rate to arrive at the solution. Any leads or solutions would be highly helpful.


1 Answer 1


Generally speaking, you would want to know the payment frequency of the MBS to know which prepayment assumption to use. In the U.S., the standard MBS pass-through security has monthly cash flows so in this case you would want to use the SMM, which is a monthly prepayment rate.

SMM, CPR and PSA are all examples of quotation conventions for prepayment rates; SMM is a monthly rate, CPR is an annualized rate, and PSA corresponds to a vector of CPRs (or, equivalently, SMMs).


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