1. The main reason that prepayment speed in the Bear Stearns model is faster than in the baseline 100 PSA model is because:
a. Alt-A borrowers typically prepay more quickly than prime borrowers.
b. Prepayments on newer mortgages increase faster in the Bear Stearns model.
c. House prices in the Bear Stearns model rise and fall unpredictably.
2. Explain the importance of "time value of money" Would you rather receive $100 today or $120 in two years? Assume a risk free available interest rate of 10% calculated annually. Show your work.