are assumed to be fixed-rate, level-payment, fully amortized mortgages with a WAC of 8.125%. It is assumed that the passthrough rate is 7.5% with a WAM of 357 months. The cash flow in Exhibit 9.1 is broken down into three components: (1) interest (based on the passthrough rate), (2) the regularly scheduled principal repayment, and (3) prepayments based on 165 PSA. Since the WAM is 357 months, the underlying mortgage pool is sea- soned an average of three months. Therefore, the CPR for month 27 is 1.65 times 6%.   Average Life Measure Because an MBS is an amortizing security, market participants do not talk in terms of an issues maturity. Instead, the average life of an MBS is computed. The average life is the average time to receipt of principal payments (scheduled principal payments and projected prepayments). Specifically, the average life is found by first calculating:   1 ´ (Projected principal received in month 1) 2 ´ (Projected principal received in month 2) 3 ´ (Projected principal received in month 3) ... + T ´ (Projected principal received in month T) Weighted monthly average of principal received   where T is the last month that principal is expected to be received. Thentheaveragelife is found as follows:     Average life = Weightedmonthlyaverageofprincipalreceived --------------------------------------------------------------------------------------------------------------------------- 12(Totalprincipaltobereceived)       Closer Look at Prepayment Risk: Contraction Risk and Extension Risk Just like the owner of any security that contains an embedded option, investors in passthrough securities do not know what their cash flows will be because of prepayments-the borrowers option to alter the mort- gages cash flows. As we noted earlier, this risk is called prepayment risk. To understand the significance of prepayment risk, suppose an investor buys an 8.5% coupon Ginnie Mae at a time when mortgage rates are 8.5%. Lets consider what will happen to prepayments if mortgage rates decline to, say, 6.5%. There will be two adverse consequences. First, a