1.Miriam Cohen manages a fixed income portfolio on behalf of the Levitt family. The Levitt’s family office is headed by Ronan Healy, who has asked Cohen to update the annual analysis of securities in the portfolio. Cohen has recently been buying significant positions in mortgage-backed securities (MBS) on behalf of the Levitt family, and Healy would like to discuss the rationale behind the positions. Healy is concerned about the duration volatility of the MBS positions in the Levitt portfolio. He points out that MBS exhibit high volatility of duration because of the embedded call option in the underlying mortgages. Cohen points out that the issue of duration volatility is most severe in planned amortization class (PAC) tranches. She reduces the volatility of the Levitt portfolio by avoiding PAC securities. Cohen points out that use of passthrough securities enables her to diversify the geographic risk of the mortgage portfolio relative to investment in individual mortgages. Healy acknowledges that the introduction of MBS has improved capital market efficiency by encouraging lenders to raise and invest funds in their respective geographic regions, where they are most efficient. Healy also argues that Cohen should consider investing more of the portfolio assets in Treasuries. He points out that there has been a shift in the fixed income markets away from benchmarking corporate credit spreads against swaps and towards benchmarking them against Treasuries. Cohen counters that swaps are frequently used by financial institutions to manage duration mismatch in the funding of their fixed-rate assets with floating-rate liabilities. Cohen’s and Healy’s statements concerning the duration volatility of MBS securities are: < >>
A) Correct Correct B) Incorrect Correct C) Correct Incorrect D) Incorrect Incorrect The correct answer was B) Cohen is incorrect because PAC tranches have lower, not higher, duration volatility than other MBS securities. Healy is correct that the embedded optionality of the underlying mortgages results in duration volatility in MBS. 2.Cohen’s and Healy’s statements concerning the geographic impact of the introduction of MBS are: < >>
A) Correct Correct B) Incorrect Correct C) Incorrect Incorrect D) Correct Incorrect The correct answer was D) Cohen is correct that investing in a pool of mortgages provides geographic diversification to the investor relative to investing in individual mortgages. Healy is incorrect. Although introduction of MBS has increased capital market efficiency, it has done so by expanding lenders’ geographic reach in accessing loanable funds, not by focusing them on their local markets. 3.Cohen’s and Healy’s statements concerning swaps are:
A) Correct Correct B) Correct Incorrect C) Incorrect Correct D) Incorrect Incorrect The correct answer was B) Cohen is correct that financial institutions frequently use swaps to manage duration mismatch. Healy is incorrect because the trend is away from benchmarking corporate rate spreads to Treasuries and towards benchmarking them against swaps. 4.The optionality of mortgage-backed securities results from which of the following? A) Interest rate swaps. B) Interest rate options. C) Mortgage refinancing. D) Interstate branch banking. The correct answer was C) The ability for American mortgage holders to repay or refinance all or part of their loans at any time they desire is akin to holding a loan with an embedded option. 5.Which of the following securities were developed to address the market inefficiency associated with the market failure of passthrough securities? A) Interstate banking certificates (IBC). B) Collateralized mortgage obligations (CMO). C) Amortization class passthroughs (ACP). D) Option-adjusted mortgage obligations (OAMO). The correct answer was B) The problem of low demand for traditional passthroughs was solved by creating collateralized mortgage obligations (CMO) that redistributed the interest rate risk among planned amortization class (PAC) tranches. PAC tranches with very little interest rate risk were attractive investments for pension funds and insurance companies. Most of the interest rate risk of the underlying mortgages was embedded in the remaining support tranches. | 
发表于 2008-4-19 18:56
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