right of homeowners to prepay their mortgages, especially when Mortgage Rates Fall below what they are currently paying. The consequences of this prepayment option is to effectively put a cap on prices of MBSs similar to call provisions on regular coupon bonds. Suppose you purchase a $100,000 face value, 30-year MBS carrying a coupon of 4 percent. 1. What is your monthly cash flow from the security? 2. What is the remaining principal balance on the mortgage if the homeowner prepays the mortgage at the end of 1-year? 3-years? 8-years? 3. How much interest will you receive in the first twelve months? Principal? 4. Calculate the price of the MBS under the following yield/prepayment scenarios: Yield Years Survived 2 percent 1-year 3 percent 3-year 4 percent 8-year 10 percent 30-year 5) What would be the prices of a $100,000 face value 4 %, 8-year Treasury bond for a yield to maturity of 2%, 3%, 4% and 10%? Comment on the different price behavior of the bond and the MBS