Series 7 practice questionmediumMortgage-Backed Securities — Weighted Average Life
The weighted average life (WAL) of a mortgage-backed security is affected MOST by:
- AThe credit rating of the issuer
- BThe prevailing level of interest rates and resulting prepayment speeds✓ Correct answer
- CThe geographic location of the underlying properties
- DThe denomination of the security
Explanation
Why B — The prevailing level of interest rates and resulting prepayment speeds
The weighted average life of an MBS is primarily determined by the rate at which the underlying mortgages are prepaid. When interest rates fall, prepayments increase (homeowners refinance), shortening WAL. When rates rise, prepayments slow, extending WAL. The Prepayment Speed Assumption (PSA) model is used to estimate prepayment rates and project WAL for different interest rate scenarios.
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