Reading 61: Valuing Mortgage-Backed and Asset-Backed Secu

答案和详解如下：

1.Paul Wilken works in the structured-product group of a large investment bank. One of his new tasks is to perform valuation analysis on mortgage-backed and asset-backed securities. Wilken has not worked with MBS or ABS in several years, so he takes some time to reacquaint himself with the many measures used to value these types of securities.

Wilken begins with the cash flow yield. He believes the cash flow yield is of little use in real-life situations. He records the following assumptions of the cash flow yield. 

§ All cash flows will come in on schedule.

§ All interim cash flows are reinvested at the cash flow yield.

§ Default risk associated with the underlying loans is constant over the life of the security.

§ Mortgage-backed or asset-backed securities are held until the final payout.

Wilken then turns his attention to the nominal spread, which he finds more useful than the cash flow yield. 

After reviewing the basics, Wilken begins work on his valuations. He has some experience using interest-rate lattice models to price interest-rate derivatives. However, he has read that the lattice-based backward-induction method cannot be used to value mortgage-backed securities (MBS). Instead, he considers the merits of zero-volatility spreads and Monte Carlo simulations. 

Wilken begins his bond-valuation assignment by considering two securities – a bond backed by credit-card loans, and a bond backed by home-equity loans. 

Wilken assigns a junior researcher, Michelle Zoellick, to help with his bond valuations. Her first job is to determine the effective durations of a series of bonds. Zoellick soon realizes that all of the dealers used by the investment bank provide different estimates for effective duration. She tries to determine why this is so, and concludes that the numbers are not equal because vendors use different assumptions for:

§ Prepayment assumptions.

§ Option-adjusted spreads.

§ Credit risk.

§  Interest-rate volatility.

Which of the following spreads are best used to value the asset-backed securities below?

A)     Z-spread                                                  Z-spread

B)     Z-spread                                                  OAS

C)     OAS                                                       Z-spread

D)     OAS                                                         OAS

The correct answer was B)

Credit-card loans do not have prepayment options, and as such can be valued using the zero-volatility spread, which does not take options into account. Bonds backed by home-equity loans do have prepayment risk, and as such require an option-adjusted spread.

2.Which of the following assumptions is NOT a limitation of the cash flow yield measure?

A)   Default risk associated with the underlying loans is constant over the life of the security.

B)   All cash flows will come in on schedule.

C)   All interim cash flows are reinvested at the cash flow yield.

D)   Mortgage-backed or asset-backed securities are held until the final payout.

The correct answer was A)

The cash flow yield measure does not rely on any credit risk assumption. The other assumptions apply to the cash flow yield, and all represent a weakness of the metric, because they are not practical in a real-life context.

3.Which of the following is NOT a reason why effective duration estimates differ from vendor to vendor?

A)   Prepayment assumptions.

B)   Option-adjusted spreads.

C)   Interest-rate volatility.

D)   Credit risk.

The correct answer was D)

Credit risk is generally built into a bond’s yield and price, and no estimates of it are needed to compute effective duration. The other assumptions can differ from vendor to vendor and result in different quote for effective duration.

4.Which of the following statements about the nominal spread is TRUE relative to mortgage-backed securities?

A)   Nominal spreads can only be calculated using a Monte Carlo simulation.

B)   A portion of the spread reflects prepayment risk.

C)   The nominal spread and the Z-spread begin to converge when the yield curve steepens.

D)   Nominal spreads work particularly well with PAC bonds.

The correct answer was B)

The nominal spread includes some compensation for prepayment risk, but investors cannot tell how much of the spread reflects that risk. Because they do not accurately portray prepayment risk, nominal spreads will not be useful for valuing PAC bonds. Analysts can calculate nominal spreads without a Monte Carlo simulation. The difference between the nominal and zero-volatility spreads widens when the slope of the yield curve increases.

5.Which of the following is a reason why the lattice-based backward-induction method is ineffective for valuing mortgage-backed securities. The method cannot handle:

A)   the path dependency of cash flows.

B)   call options.

C)   a lack of time-series price data, which can be difficult to obtain for MBS.

D)   variable interest rates.

The correct answer was A)

MBS prepayments depend on the level of the interest rate at a particular point in time and also on the path the interest rate has taken in order to get to a certain level. Backward induction can't easily capture path-dependent cash flows, and as such is not useful for predicting prepayments. Backward induction can account for call options and variable interest rates. The method does not require time-series price data.