Reading 61: Valuing Mortgage-Backed and Asset-Backed Secu style, black, adjusted, speaking, like

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1.Generally speaking, an analyst would like the adjusted spread (OAS) to be:

A)   small.

B)   zero.

C)   negative.

D)   big.

2.A collateralized mortgage obligation (CMO) bond structure includes four tranches, A, B, C, and D, with the following characteristics:

Tranche	OAS (in BP)	Option Cost (in BP)
A	54	73
B	55	94
C	68	71
D	56	90

Using this information, which of the tranches appears to be cheap?

A)   C.

B)   A.

C)   B.

D)   D.

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答案和详解如下：

1.Generally speaking, an analyst would like the adjusted spread (OAS) to be:

A)   small.

B)   zero.

C)   negative.

D)   big.

The correct answer was D)

Generally speaking, an analyst would like the OAS to be big.

2.A collateralized mortgage obligation (CMO) bond structure includes four tranches, A, B, C, and D, with the following characteristics:

Tranche	OAS (in BP)	Option Cost (in BP)
A	54	73
B	55	94
C	68	71
D	56	90

Using this information, which of the tranches appears to be cheap?

A)   C.

B)   A.

C)   B.

D)   D.

The correct answer was A)

A large OAS indicates a wider risk-adjusted spread and lower relative price. Option cost measures prepayment risk. In general, the highest OAS and lowest option cost is most attractive. Tranche C has the highest OAS and the lowest option cost at the same time.