Why is an assumed prepayment speed necessary to project the cash flow of a pass-through?
Answer to relevant QuestionsWhat does a conditional prepayment rate of 8% mean? Answer the below questions. (a) What factor can be used as a proxy for cash-out refinancing incentives? (b) Why are prepayments attributable to cash-out refinancing likely to be insensitive to changes in mortgage rates? Answer the below questions. (a) Distinguish between a TBA and specified pool trade. (b) What delivery options are granted to the seller in a TBA trade? How does a CMO alter the cash flow from mortgages so as to shift the prepayment risk across various classes of bondholders? Suppose that for the first four years of a CMO, prepayments are well within the initial PAC collar. What will happen to the effective upper collar?
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