In this ar ti cle, the authors de vel oped an al ter na tive meth od ol ogy to cal cu late the option-adjusted spread for the mortgage-backed se cu ri ties us ing par tial dif fer ential equa tion tech nique. The nu meri cal im ple men ta tion is dis cussed in de tail, includ ing the con ver gence and er ror analy sis. This ap proach pro vides us a fast and ac cu rate way to pric ing MBS. Par tial dif fer en tial equa tions for mortgage-backed se cu ri ties We start with the gen eral form of

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... Nfactor in ter est term struc ture model. Suppose that r 1 is the short-term (theo reti cally, the in stan ta ne ous) in ter est rate, and r 2 , r 3 , ..., r N are cur rent rates of longer terms. They fol low 94 Volume 24 Number 9/10 1998