Create a dollar roll matrix of breakeven rates for an agency MBS with gross and deal coupons of 8.035% and 7.5%, respectively, and settlement dates 6/14/16 and 9/15/16. Assume standard fully amortizing fixed rate mortgages with a term of 30:0, a WAM of 29:5 and an immediate price of 96-16. MBS CF’s are due the owner of record on the first of each month, but are paid on the 25th of that month.
In the hardcopy you send in, you MUST show the analysis for a PSA of 150, a forward drop of 35/32, and a reinvestment rate of 2% (act/360).
Calculate breakeven rates for PSAs of 120, 150, and 180, and forward drops of -40, -35, and -30 (32’s).
(b) Discuss the risks of roll vs. hold from the perspective of the investor.
(c) Why does the dollar roll market exist?