Bonds: Simplified
The basic idea
Mortgage pools pay scheduled principal and interest, but borrowers can also refinance, move, or otherwise pay off loans early. MBS prepayment speed turns that behavior into a model assumption. Faster speeds return principal sooner; slower speeds leave more balance outstanding for longer.
How it affects analytics
Changing prepayment speed changes the timing of projected cash flows. That affects price, yield, weighted average life, duration, and Treasury spread comparisons. In Bonds: Simplified, the MBS screen shows rate scenarios, CPR or PSA speeds, WAL, TSY spread, cash flow charts, and amortization detail together.
Rate environment matters
When rates fall, refinancing can become more attractive and prepayments may speed up. When rates rise, refinancing incentive can fade and the MBS can extend. This creates contraction risk and extension risk, which is why prepayment speed belongs next to rate shock analysis.
What to watch
- Current factor and remaining months define the remaining pool balance and seasoning.
- Gross coupon and net coupon shape scheduled mortgage cash flows and investor income.
- PSA or CPR assumptions translate into additional principal payments.
- WAL and effective duration summarize timing and price sensitivity.