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CFA Level I · CFA Level I Exam · Mortgage-Backed Security (MBS) Instrument and Market Features

A pass-through security has a pool of mortgages with a weighted average coupon (WAC) of 5.40% and a pass-through rate of 4.90%. The 0.50% difference is most likely attributable to:

The gap between the weighted average coupon and the pass-through rate is explained by servicing and other fees, such as guarantee fees, which are deducted from the borrowers' interest before the remainder is passed to investors. Prepayments and price premiums do not create this rate difference.

  1. Aservicing and other fees retained from the borrowers' interest paymentsCorrect
  2. Bthe premium paid by investors over par for the security
  3. Ca reduction in the rate caused by prepayments on the pool

Explanation

The pass-through rate equals the WAC minus servicing and guarantee fees. Prepayments change the principal balance and the WAM, not the stated rate difference, and price premiums do not affect the rate.

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