Question

Which of the following statements is true regarding the PSA prepayment model?

a. PSA stands for Private Securities Attributes

b. 100% PSA model assumes higher prepayment rates than 200% PSA model

c. Under the PSA assumption borrowers prepay less in the first few months after taking a loan relative to later months

d. PSA model can not be adjusted to incorporate market conditions

e. All of the above

Answer 1

A)FAlse = PSA stands for Public securities association

B)FAlse= If 100% PSA takes increase in 0.2% in the starting therefore 200%= 2*0.2%=0.4% hence 200psa will have higher prepayment rates.

C)True:Under PSA intially prepayment is increasing rate and then becomes constant after the fixed tenure of however payment initially is at a lower rate which gradually increases

D) false :PSA model has an assumption that prepayment rates keep fluctuating.It is not like constant payment model hence market conditions can be adjusted depending on the underlying used in PSA model.

E)hence C is true not all the above

I hope the answer is clear please you may ask any doubt.