Q-510.2. Consider the scenario (a variation on Tuckman's example²) illustrated below. Suppose that the TBA prices of the Fannie Mae 6% for July 9 and August 9 settlements are $103.00 and $102.60, respectively. The accrued interest to be added to each of these prices is 9 actual/360 days of a month’s worth of a 6.0% coupon, i.e., $100 \times (9/30) \times 6.0% / 12$or `$0.15`0$. Let the expected total principal paydown, that is, scheduled principal plus prepayments, be 2.0% of outstanding balance and let the appropriate short-term rate be 1.0%.

If an investor rolls a balance of $10.0 million, proceeds from selling the July TBA are $10.0 million $\times (103.00 + 0.150)/100$ or $10,315,000.00$. Investing these proceeds to August 9 at 1.0$10,315,000.00 \times (31/360) \times 1.0\%$ or $8`,882.36$. Then, purchasing the August TBA, which has experienced a 2.0% principal paydown, costs $10.0 million $\times (1 - 2.0\%) \times (102.60 + 0.150)/100$ or $10,069,500.00$. The net proceeds from the roll, therefore, are `$10,315,000.00 + $8`,882.36 - `$10,069,500.00$ or $254`,382.36$. If the investor does not roll, the net proceeds are the coupon plus principal paydown: $10,000,000.00 \times (6.0%/12 + 2.0%)$or `$250`,000.00$.

Fannie Mae 5%	6% coupon	Balance	$10,000,000.00
Settlement prices
7/9/2015	$103.00
8/9/2015	$102.60
Days of accrued interest (AI)
Accrued interest (AI)	$0.150
Expected total principal paydown	2.00%
Short-term interest rate	1.00%

Buying the roll
Sell July TBA, proceeds $10,315,000.00
Earned interest $8,882.36
Purchase August TBA, full price $102.75
Purchase $10,069,500.00
Net proceeds $254,382.36

Holding the pool
$250,000.00

Given this scenario, which of the following is TRUE?