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The Handbook of Mortgage-Backed Securities7th Edition$
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Frank J. Fabozzi

Print publication date: 2016

Print ISBN-13: 9780198785774

Published to Oxford Scholarship Online: October 2016

DOI: 10.1093/acprof:oso/9780198785774.001.0001

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Cash Flow Mathematics for Agency Mortgage-Backed Securities

Cash Flow Mathematics for Agency Mortgage-Backed Securities

Chapter:
(p.87) Chapter 3 Cash Flow Mathematics for Agency Mortgage-Backed Securities
Source:
The Handbook of Mortgage-Backed Securities
Author(s):

Frank J. Fabozzi

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780198785774.003.0003

This chapter show how to compute the components of the cash flow for an agency mortgage-backed security (MBS)—interest, scheduled principal, and prepayments—given an assumed prepayment rate. The calculation of the cash flow of a mortgage-backed security depends on the assumed prepayment rate for the pool of loans backing the security. Once a prepayment assumption is made, the cash flow for an agency MBS can be derived. For a non-agency MBS, an assumption for both the prepayment rate and default/recovery rates must be made. The computed cash flow is not only important for the analysis of mortgage passthrough securities but also in mortgage-related structures that have as their collateral a mortgage passthrough security or a pool of passthrough securities, such as collateralized mortgage obligations and stripped mortgage-backed securities.

Keywords:   cash flow, agency mortgage-backed security, interest, scheduled principal, prepayments, assumed prepayment rate, pool of loans, MBS, mortgage passthrough securities, mortgage-related structures

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