CoachThe prepayment S-curve is the refinancing speed as a function of the incentive: near zero out of the money, rising steeply over a few tens of basis points of incentive, flattening at a maximum. Burnout is the decline of a pool’s response to a given incentive after it has already been exposed to incentives: the borrowers who could and would refinance have left, and those who remain are slower.
Exemplos
Example 12.7 (A premium pool at par)
A pool with a WAC of 6.0%, a coupon of 5.5%, 348 months left, on chapter 1’s SOFR curve (ten-year par rate 3.80% in the model’s annual convention, so a mortgage rate of 5.55% and an incentive of 0.45%), with Hull–White , basis points and 4 000 paths, priced at 100: its option-adjusted spread is 146 basis points, its zero-volatility spread 181, and its option cost 34. Its effective duration is 4.99 years, its effective convexity , its weighted-average life 6.4 years. Without burnout the same pool at the same spread would be worth 99.20: faster prepayment of a premium pool returns principal at par sooner.