One fixed-rate mortgage pool has a 750 PSA and a second fixed-rate pool has 150 PSA. The pool with the higher PSA ________ than the pool with the lower PSA.
I. probably has a higher coupon
II. probably has lower default risk
III. will mature more quickly

Question

Quizplus · Accepted Answer

The pool with a higher PSA (750 PSA) will likely have a higher prepayment rate, which means it will mature more quickly (III) and might have a higher coupon to compensate for the increased prepayment risk (I). PSA does not directly relate to default risk (II), so that statement is not necessarily true.

One Fixed-Rate Mortgage Pool Has a 750 PSA and a Second