Cashflow to investors therefore subject to fluctuations downwards at an unknown rate. Good news to investors - low market rates increase PV of cashflows and principal is likely to be repaid ahead of expectations. Bad news to investors - less interest return and reduction in market rates will reduce reinvestment income. Prepayment Models Empirical models are developed based on historical observations of prepayment rates based on a varying scenario of circumstances. When Class A repaid in full, all prepayments to Class B etc.
Price therefore reflects liquidity and term of investment.
In addition class C bonds become progressively safer as average amount outstanding on each mortgage decreases. Regulators concerned about this procedure. FI still has capital adequacy requirements to meet. Effectively the sale of bonds attaching to either principal or interest repayment streams. Not used in Australia at present.