I just am not getting this to sink in: why is the average life of an MBS a more relevant measure than its maturity? heeeeeeeeeelp from macedonia???
By the time a pass-through MBS gets to it’s stated maturity date (let’s say that date is thirty years in the future), the actual amount of principal outstanding will be very small (think about your parent’s mortgage, if you must – as it’s been paid down all along, there’s not much principal left to pay off in the last few years). So this mortgage backed security isn’t really like a thirty year bond, is it? So you could have a $1mm investment in an MBS that, by the time year 26, or 27 rolls around, is only worth $100K or $50K. On the other hand, the weighted average maturity of the MBS gives you an approximate idea of the time to get your principal back. The weighted maturity will be shorter than the stated maturity because of the expectation that the security will be paid down over it’s life.
oooo plyon… you make knowledge attractive and complex things simple… as usual in a spirited manner (hahahahahahaha just don’t mind me…) …by the way are we required to calculate this as the text book does or we are just to ‘explain why the average life of a MB S is a more relevant measure…’ more help from macedonia …
Well, the LOS states “Explain why the average life … is more relevant … than the security’s maturity”… You will not be asked to calculate the average life.