A modification of standard duration to account for the impact on duration of MBSs of changes in prepayment speed resulting from changes in interest rates. Two factors are employed: one that reflects the impact of changes in prepayment speed or price.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.
The number of years until an investor receives the present value of all income from a mortgage-backed security (including interest and principal). It is used to gauge a mortgage-backed security's sensitivity to interest rate changes. The longer a mortgage duration is, the more an MBS declines in value when interest rates rise, and the more it rises when they fall.
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