This chapter describes residential mortgage-backed securities (MBSs). Cash flows of MBSs are calculated using various prepayment conventions and assumptions used in practice. Measures of prepayments such as the constant proportional prepayments rate (CPR) and Public Securities Association (PSA) rates are introduced in a simple setting for single mortgages and then extended to pools of mortgages. The prepayment option and the factors that influence prepayments are described in detail. A simple model of prepayment is presented to illustrate how MBSs are priced. The concept of the option-adjusted spread (OAS) is introduced and explained.
12.1 Overview of Mortgage-Backed Securities
As noted in the ...