Monthly Cash Flow Construction We now show how to construct a monthly cash ow for a hypothetical pass-through given a PSA assumption. For the purpose of this illustration, the underlying mortgages for this hypothetical pass-through are assumed to be xed-rate level-payment mortgages with a WAC of8. 125%. It will be assumed that the pass-through rate is 7.5%, with a WAM of357 months. Exhibit 11-3 shows the cash ow for selected months assuming 100 PSA. The cash ow is broken down into three components: (1) interest (based on the pass-through rate), (2) the regularly scheduled principal repayment, and (3) prepayments based on 100 PSA. Let's walk through Exhibit 11-3 column by column. Column 1 This is the month. Column 2 This column gives the outstanding mortgage balance at the beginning of the month. It is equal to the outstanding balance at the beginning of the preceding month reduced by the total principal payment in the preceding month. Column 3 This column shows the SMM for 100 PSA. Two things should be noted in this column. First, for month 1. the SMM is for a pass-through that has been seasoned three months. That is. the CPR is 0.8%. This is because the WAM is 357. Second. from month 27 on, the SMM is 0.00514, which corresponds to a CPR of 6%. Column 4 The total monthly mortgage payment is shown in this column. Notice that the total monthly mortgage payment declines over time as prepayments reduce the mortgage balance outstanding. There is a formula to determine what the monthly mortgage balance will be for each month given prepaymentsf' Column 5 The monthly interest paid to the pass-through investor is found in this column. This value is determined by multiplying the outstanding mortgage balance at the beginning of the month by the pass-through rate of 7.5% and dividing by 12. Column 6 This column gives the regularly scheduled principal repayment. This is the difference between the total monthly mortgage payment (the amount shown in column 4) and the gross coupon interest for the month. The gross coupon interest is 8.125% multiplied by the outstanding mortgage balance at the beginning of the month, then divided by 12. Column 7The prepayment for the month is reported in this column. The prepayment is found by using equation (11.2). So, for example, in month 100, the beginning mortgage balance is $231,249,776, the scheduled principal payment is $332,928, and the SMM at 100 PSA is 000514301 (only 0.00514l is shown in the table to save space), so the prepayment is 0.00514301($23l.249,776 $332,928) = $1.187,608 Column 8 The total principal payment, which is the sum of columns 6 and 7, is shown in this column. Column 9 The projected monthly cash ow for this pass-through is shown in the last column. The monthly cash ow is the sum of the interest paid to the pass- through investor (column 5) and the total principal payments for the month (column 8). Exhibit 1 1-3 Monthly Cash Flow for a $400 Million 7.5% Pass-Through Rate with a WAC of 8.125% and a WAM of 357 Months Assuming 100 PSA (1) (2) (3) (4) 6 1 ( Payment - Outstanding * WAC ) (7) J (8) (9) In Investor (6 ) + (7 ) (5 + ( 8 ) Outstanding Mortgage Scheduled Total Total Month Balance SMM Payment Interest Principal Prepayment Principal Cash Flow 1 400,000,000 0.00067 2,975,868 2,500,000 267,535 267,470 535,005 3,035,005 2 399,464,995 0.00084 2,973,877 2,496,656 269,166 334,198 603,364 3,100,020 3 398,861,631 0.00101 2,971,387 2,492,885 270,762 400,800 671,562 3,164,447 4 398,190,069 0.00117 2,968,399 2,488,688 272,321 467,243 739,564 3,228,252 5 397,450,505 0.00134 2,964,914 2,484,066 273,843 533,493 807,335 3,291,401 6 396,643,170 0.00151 2,960,931 2,479,020 275,327 599,514 874,841 3,353,860 395,768,329 0.00168 2,956,453 2,473,552 276,772 665,273 942,045 3,415,597 8 394,826,284 0.00185 2,951,480 2,467,664 278,177 730,736 1,008,913 3,476,577 9 393,817,371 0.00202 2,946,013 2,461,359 279,542 795,869 1,075,410 3,536,769 10 392,741,961 0.00219 2,940,056 2,454,637 280,865 860,637 1,141,502 3,596,140 11 391,600,459 0.00236 2,933,608 2,447,503 282,147 925,008 1,207,155 3,654,658 12 390,393,304 0.00254 2,926,674 2,439,958 283,386 988,948 1,272,333 3,712,291 13 389,120,971 0.00271 2,919,254 2,432,006 284,581 1,052,423 1,337,004 3,769,010 14 387,783,966 0.00288 2,911,353 2,423,650 285,733 1,115,402 1,401,134 3,824,784 15 386,382,832 0.00305 2,902,973 2,414,893 286,839 1,177,851 1,464,690 3,879,583 16 384,918,142 0.00322 2,894,117 2,405,738 287,900 1,239,739 1,527,639 3,933,378 17 383,390,502 0.00340 2,884,789 2,396,191 288,915 1,301,033 1,589,949 3,986, 139 18 381,800,553 0.00357 2,874,992 2,386,253 289,884 1,361,703 1,651,587 4,037,840 19 380,148,966 0.00374 2,864,730 2,375,931 290,805 1,421,717 1,712,522 4,088,453 20 378,436,444 0.00392 2,854,008 2,365,228 291,678 1,481,046 1,772,724 4,137,952 21 376,663,720 0.00409 2,842,830 2,354,148 292,503 1,539,658 1,832,161 4,186,309 22 374,831,559 0.00427 2,831,201 2,342,697 293,279 1,597,525 1,890,804 4,233,501 23 372,940,755 0.00444 2,819,125 2,330,880 294,005 1,654,618 1,948,623 4,279,503 24 370,992,132 0.00462 2,806,607 2,318,701 294,681 1,710,908 2,005,589 4,324,290 25 368,986,543 0.00479 2,793,654 2,306,166 295,307 1,766,368 2,061,675 4,367,841 26 366,924,868 0.00497 2,780,270 2,293,280 295,883 1,820,970 2,116,852 4,410,133 27 364,808,016 0.00514 2,766,461 2,280,050 296,406 1,874,688 2,171,092 4,451,144 233 28 362,636,921 0.00514 2,752,233 2,266,481 296,879 1,863,519 2,160,398 4,426,879 29 360,476,523 0.00514 2,738,078 2,252,978 297,351 1,852,406 2,149,758 4,402,736