Question

Principal-Only MBS and Interest-Only MBS) Suppose we construct principal-only (PO) and interest-only (IO) mortgage-backed securities (MBS) using the mortgage pass-through of the previous questions. Assume a prepayment multiplier of 100 PSA. What is the present value of the PO MBS if we use an annual risk-free rate of 4.5% to value the cash-flows? Outstanding balance of mortgage 400 millions term of loan 20 years.

P.S Please don't copy paste answers present in this website because nobady has replied to this question correctly, I have already checked

Answer 1

Prepayment model
PSA model
Prepayment will influence the cash flow of MBS significantly as it is a crucial part
in pricing. PSA will be the model used to calculate prepayment cash flow in the paper because the model
fits the reality better.
In PSA100 model, we assume that the prepayment rate starts from 0.2%, increase evenly during the next
29 months to 6% and remain constant at 6% in the rest of loan life, which can be summarized as:
CPR=t*6%/30, t≤30
CPR=6%, t>30
The 100 in PSA100 indicates a multiplier of the loan prepayment speed.