Question

Create a dollar roll matrix of breakeven rates for an agency MBS with gross and deal coupons of 8.035% and 7.5%, respectively, and settlement dates 6/14/18 and 8/15/18. Assume standard fully amortizing fixed rate mortgages with a term of 30:0, a WAM of 29:5 and an immediate price of 96-16. MBS CF’s are due the owner of record on the first of each month, but are paid on the 25^th of that month. Assume standard PSA benchmarks.

The spreadsheet should correctly calculate the dollar advantage for any input above (though only for a two-month roll - not 1, or 3 or more). I do suggest you try to recreate the 1 month dollar roll in the lecture pdfs first, to get a feel for how it’s done (and you can submit this “test run” on a separate worksheet along with your 2-month answer for partial credit if warranted). Do not hardcode inputs in formulae, e.g., rates/coupons, dates, terms or WAMs, prices, reinvestment rates (though you can stick to act/360), balances, PSA, etc.

Calculate the breakeven matrix for PSAs of 100, 150, and 1200, and forward drops of -40, -35, and -30 (32’s) for the inputs listed in the first paragraph (these, or course, will be fixed numbers).

Answer 1

ANSWER: - In order to transact a dollar roll, an investor must own on-the- run current coupon mortgage- term liquidity and can be viewed as concurrently selling securities with an agreement to purchase “substantially similar” securities in the future at a predetermined price. It's important to consider stipulations such as maximum weighted average loan age (WALA), maximum purchased CUSIPs, and zero variance in order to assert "substantially similar securities is fulfilled. backed securities. The dollar roll provides short 9 Currently, dollar rolls are trading "special,