impact of prepayment on the cash inflow of MSB holder

hi, I know that holder of MBS (mortgage backed security) would face the prepayment risk.

Suppose under the MBS, the holder will receive 500 pounds p.a. for an outstanding term of 10 years.
And all mortgagee prepay all mone.


How the occur of prepayment affect th cash inflows, i.e. coupons and redemption value, for MBS holder?

Not affected, he will still receive 500 pounds p.a. for 10 years.

He will receive the present value of all the future cash inflow

He will receive all the "prepaid money" that mortgagees repay now.

 

Uktous
Not sure if I understood your question clearly, but I will make an attempt none-the-less. I think you are trying to understand why prepayment is a risk, is that correct? You could clarify further if your ques is not answered or my answer does not make sense!

For simplicity - consider 3 parties involved:
M - the person taking out a mortgage
B - the bank
LI - an investment bank or insurer

M takes out a mortgage with B. B gives M a lumpsum in return for regular payments for 25 yrs. Let us say it is an interest only mortgage.
This mortgage is now an asset on the banks balance sheet.
The bank will re-package this asset as a bond and sell it to an insurer (say) LI.
M pays interest on the mortgage to B.
B pays this to LI.
LI pays this to a PH who has an annuity contract with LI.
These payments from B to LI match the payments from LI to PH by amount and timing. So, LI is happy!!

Now, if M prepays the mortgage and B prepays the bond, then LI will be left with a large sum of money and spoils the exact match it had with payments to PH (mismatch risk).
Also, if LI decides to buy a bond but interest rates are low, then the bonds will be expensive. So, there is a reinvestment risk as well to LI from prepayment of bond.

So, LI will not allow B to prepay and so B will not allow M to prepay.

Okay, I have written way toooo much and probably already covered most of what you already know (apologies for that!).

Hope this helps.