mik82

To forecast the necessary cash flow throughout the life of the MBS or ABS so that one can calculate CFY, a lot of assumptions need to be taken.
- Prepayment
- For non agency MBS, default rates and recovery rates.
Those assumptions (i.e., input numbers) don’t have to be constant over time, thus having to be constant is NOT a constraint for this method. In fact, those assumptions HAVE to vary over time dependent on, among others, forecast about future interest rates, economy development,..
- In addition, there are implicit assumptions of CF reinvested at CFY rate and securities hold until maturity.