[Verse 1] Sarah bought a mortgage bond, thinking payments would stay steady But homeowners refinanced when rates dropped, caught her unready Prepayments came flooding in, disrupting her cash flow stream What seemed like guaranteed income became a shattered dream [Chorus] CPR measures the speed, Conditional Prepayment Rate indeed PSA models predict the trend, when mortgage payments early end SMM shows monthly decay, Single Monthly Mortality's way Prepayment risk will steal your yield, when borrowers break from payment field [Verse 2] When interest rates tumble down, homeowners see refinance gold They escape their higher payments, leave investors out in cold Extension risk works opposite, when rates climb toward the sky Borrowers stay locked in place, while bond values nose-dive [Chorus] CPR measures the speed, Conditional Prepayment Rate indeed PSA models predict the trend, when mortgage payments early end SMM shows monthly decay, Single Monthly Mortality's way Prepayment risk will steal your yield, when borrowers break from payment field [Bridge] PSA benchmark starts at zero, ramps to six percent plateau One-fifty PSA means fifty percent faster than the standard flow Convert CPR to SMM, divide by twelve and calculate Understanding prepayment timing helps you estimate your fate [Verse 3] Negative convexity strikes when prices cap despite rate drops While duration extends further than your risk model predicts or stops Premium bonds face brutal hits when prepayments accelerate Discount bonds gain some protection from this refinancing fate [Outro] Watch the CPR and SMM, track the PSA model's call Prepayment risk in mortgage bonds can devastate them all
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