hard · Asset-Backed Securities
An agency MBS priced at 103 (3 points premium) has a weighted average life (WAL) of $4.0 years at 12% CPR.
If interest rates drop and the CPR accelerates to 20%, shortening the WAL to 2.5 years, how does this affect the investor's yield?
- The yield increases because the investor receives their principal back sooner to reinvest at higher rates.
- The yield is unchanged because the coupon rate on the MBS is fixed.
- The yield decreases because the 3-point premium must be amortized over a shorter period.
- The yield increases because faster prepayments reduce the duration risk.
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