The logic of this formula is that the principal balance remaining after s payments is always the present value of the remaining 12T-s payments discounted at the contract rate of interest
To the extent that prepayments cannot be perfectly predicted, they create uncertainty about the term of mortgage loans.
This uncertainty is a disadvantage from the standpoint of an investor.
What’s worse: Prepayments are more likely when rates fall and less likely when they rise, so prepayment risk is positively correlated with interest rate risk
So if you owned a pass-through with a beginning of the month balance of $181,824.99 and $494.30 of scheduled principal payments, then prepayments would be predicted at
Be the first to comment