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Up1
Question: MBS currently priced at 103 and security expected to generate constant cash flow of $1.28 per month per $100 par for 10 years. Calculate the monthly cash flow yield.
Apparently, doing N = 120; PV = -103; PMT = 1.28; FV = 100 and CPT I/Y = 1.232 is incorrect.
But excluding the FV (or FV = 0) and CPT I/Y = 0.7128 is the correct answer.
Could someone explain why the first method is incorrect?
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Up4
@vincentt – since this is a MBS, the cashflow repayment include schedule principal repayments, hence FV=0. So at the end of life of an MBS, it should be expected that the whole mortgage is repaid in full.
The maturity of MBS is uncertain as there are prepayment risks, i.e. people prepaying more than the minimum amount each month, hence shortening the life of the mortgage.
It’s always related to bond equivalent yield, so make sure you get these 2 concepts right.
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