MBS WAL

CFA General
#1

How would one calculate the weighted average life of an MBS given various prepayment assumptions?

#2

look at level 2 fixed income curriculum.

#3

Determine your monthly CPR and CDR, then run an amortization through full payment. Then weight the later parts of the principal by the consecutive months they go out, divide by the total sum of the months. Of course, considering the CPR and CDR variables, you will end up with multiple runs. How many are you looking to go through? Done.

#4

so you would divide expected principal by remaining months? I am only looking to run 3 different scenarios…

#5

Since MBS are amortizing instruments, the principal paid back consist of scheduled princial payment and extected prepayment (depending on contraction and extension risk of the pool backed). The expected prepayment can be measured by Conditional repayment rate (CPR) using some standard benchmark like 100PSA. So everytime, get the Principal Balance and the number of months left, run a amortizing schedule depending on the prepayment assumptions and weight-out the duration needed to repay back the principal in full (aka WAL)

#6

I got it: Forumula = sumproduct(time period, principal CF)/sum of principal CFs

#7

I’m not sure the exact calculation, but doesn’t it all come down to your PSA assumption?

#8

if you use psa - im using cpr, cdr and severity