答案和详解如下：

1.Bill Woods, CFA, is a portfolio manager for Matrix Securities Fund, a closed-end bond fund that invests in U.S. Treasuries, mortgage-backed securities (MBS), asset-backed securities (ABS), and MBS derivatives. The fund has assets of approximately $400 million, has a current stock price of $14.50 and a net asset value (NAV) of $16.00. Woods is a member of a four person investment team that is responsible for all aspects of managing the portfolio, including interest rate forecasting, performing basic financial analysis and valuation of the portfolio, and selecting appropriate investments for Matrix. His expertise is in the analysis and valuation of MBS and ABS.

The fund pays a $.12 monthly dividend that is paid from current income. The basic operating strategy of Matrix is to leverage its capital by investing in fixed income securities, and then financing those assets through reverse repurchase agreements. Matrix then earns the spread between the net coupon of the underlying assets and the cost to finance the asset. Therefore, when evaluating a security for investment, it is critical that Matrix can be reasonably assured that it will earn a positive spread.

During the course of his analysis, Woods utilizes several methodologies to evaluate current portfolio holdings and potential investments. Valuation methods he uses include nominal spreads, Z-spreads, and option-adjusted spreads (OAS). There is ongoing debate among the investment team as to the merits and shortcomings of each of the methods. Woods believes that the OAS method is by far a superior tool in all circumstances, while his fellow portfolio manager, Yuri Ackerman, feels that each of the methods can at times serve a useful purpose. Wood and Ackerman’s current discussion involves two similar FNMA adjustable-rate mortgage (ARM) securities Wood is considering purchasing. Both ARM “A” and ARM “B” are indexed off of 6-month LIBOR, are new production, and have similar net coupons.

Select Financial Information:

ARM	Net Coupon	WAM	Nominal Spread	OAS (bps)	Z-spread (bps)
A	6.27%	360	81	98	135
B	6.41%	358	95	116	129

Woods recommends that Matrix purchase ARM “A” with the 6.27% net coupon. He has based his conclusion on the calculated OAS of the securities, which he believes indicates that ARM “A” is the cheaper of the two securities. Ackerman disagrees with Woods, arguing that OAS is only one component of any analysis, and that a buy or sell recommendation should not be made based upon the OAS spread alone. Ackerman claims that other measures, such as one of the many duration measures and convexity, need to be incorporated into the analysis. He points out that both ARMs have equal convexities, but ARM “A” has a duration of 7.2 years and ARM “B” has duration of 6.8 years. These characteristics will affect the expected return in any interest rate scenario. Woods admits that he had not considered the differences in the bond’s durations, and he acknowledges that others factors should be considered before a recommendation can be made.

Woods is most likely resistant to the zero-volatility spread because the spread:

A)   does not indicate how much of the spread reflects the significant prepayment risk associated with MBS.

B)   fails to consider price risk, which is uncertainty regarding terminal cash flows.

C)   is subject to modeling risk, which is uncertainty in value resulting from the use of assumptions within the model.

D)   only considers one path of interest rates, the current Treasury spot rate curve.

The correct answer was D)

Zero-volatility spread is a commonly used measure of relative value for MBS and ABS. However, it only considers one path of interest rates, while OAS considers every spot rate along every interest rate path.

2.OAS can be used to derive option cost rather than using an option pricing model. The OAS can be interpreted as the MBS spread after the affect of the embedded option on cash flows is considered. Which of the following summaries is most accurate?

A)   option cost = option-adjusted spread – zero-volatility spread.

B)   option cost = option-adjusted spread – nominal spread.

C)   option cost = zero-volatility spread – option-adjusted spread.

D)   option cost = nominal spread – option-adjusted spread.

The correct answer was C)

OAS is the MBS spread after the “optionality” of the cash flows is taken into account. OAS can be used to express the dollar difference between price and theoretical value as a spread.

3.Using the pricing data for the two FNMA ARM securities given above, what is the option cost of each security if the effective durations of the two securities are equal?

A)   ARM A = 54 basis points; ARM B = 34 basis points.

B)   ARM A = 17 basis points; ARM B = 21 basis points.

C)   ARM A = 37 basis points; ARM B = 13 basis points.

D)   ARM A = 233 basis points; ARM B = 245 basis points.

The correct answer was C)

Recall that option cost = zero-volatility spread – option-adjusted spread, therefore:

ARM A option cost = 135 – 98 = 37 basis points.
ARM B option cost = 129 – 116 = 13 basis points.

4.In general, the investment team at Matrix attempts to buy “cheap” securities because they are undervalued on a relative basis. What is a characteristic of a “cheap” security for a given Z-spread and effective duration?

A)   Low OAS relative to the required OAS and low option costs.

B)   High OAS relative to the required OAS and high option costs.

C)   Low OAS relative to the required OAS and high option costs.

D)   High OAS relative to the required OAS and low option costs.

The correct answer was D)

A higher OAS indicates a larger risk-adjusted spread, which leads to a lower relative price. The implied cost of the embedded option in a security with a call feature is the option cost, so a buyer would prefer a lower cost.

5.Which of the two bonds Woods is considering purchasing has the greater interest rate exposure?

A)   ARM A, because it has a larger duration.

B)   ARM B, because it has a smaller duration.

C)   The two ARMs have equal convexity measures, and therefore identical interest rate exposure.

D)   The interest rate exposure cannot determine without a specific measure of convexity.

The correct answer was A)

Effective duration is a measure of interest rate risk. All things equal, the larger the duration of a security the greater the interest rate risk.

1.Bill Woods, CFA, is a portfolio manager for Matrix Securities Fund, a closed-end bond fund that invests in U.S. Treasuries, mortgage-backed securities (MBS), asset-backed securities (ABS), and MBS derivatives. The fund has assets of approximately $400 million, has a current stock price of $14.50 and a net asset value (NAV) of $16.00. Woods is a member of a four person investment team that is responsible for all aspects of managing the portfolio, including interest rate forecasting, performing basic financial analysis and valuation of the portfolio, and selecting appropriate investments for Matrix. His expertise is in the analysis and valuation of MBS and ABS.

The fund pays a $.12 monthly dividend that is paid from current income. The basic operating strategy of Matrix is to leverage its capital by investing in fixed income securities, and then financing those assets through reverse repurchase agreements. Matrix then earns the spread between the net coupon of the underlying assets and the cost to finance the asset. Therefore, when evaluating a security for investment, it is critical that Matrix can be reasonably assured that it will earn a positive spread.

During the course of his analysis, Woods utilizes several methodologies to evaluate current portfolio holdings and potential investments. Valuation methods he uses include nominal spreads, Z-spreads, and option-adjusted spreads (OAS). There is ongoing debate among the investment team as to the merits and shortcomings of each of the methods. Woods believes that the OAS method is by far a superior tool in all circumstances, while his fellow portfolio manager, Yuri Ackerman, feels that each of the methods can at times serve a useful purpose. Wood and Ackerman’s current discussion involves two similar FNMA adjustable-rate mortgage (ARM) securities Wood is considering purchasing. Both ARM “A” and ARM “B” are indexed off of 6-month LIBOR, are new production, and have similar net coupons.

Select Financial Information:

Woods recommends that Matrix purchase ARM “A” with the 6.27% net coupon. He has based his conclusion on the calculated OAS of the securities, which he believes indicates that ARM “A” is the cheaper of the two securities. Ackerman disagrees with Woods, arguing that OAS is only one component of any analysis, and that a buy or sell recommendation should not be made based upon the OAS spread alone. Ackerman claims that other measures, such as one of the many duration measures and convexity, need to be incorporated into the analysis. He points out that both ARMs have equal convexities, but ARM “A” has a duration of 7.2 years and ARM “B” has duration of 6.8 years. These characteristics will affect the expected return in any interest rate scenario. Woods admits that he had not considered the differences in the bond’s durations, and he acknowledges that others factors should be considered before a recommendation can be made.

Woods is most likely resistant to the zero-volatility spread because the spread:

A)   does not indicate how much of the spread reflects the significant prepayment risk associated with MBS.

B)   fails to consider price risk, which is uncertainty regarding terminal cash flows.

C)   is subject to modeling risk, which is uncertainty in value resulting from the use of assumptions within the model.

D)   only considers one path of interest rates, the current Treasury spot rate curve.

2.OAS can be used to derive option cost rather than using an option pricing model. The OAS can be interpreted as the MBS spread after the affect of the embedded option on cash flows is considered. Which of the following summaries is most accurate?

A)   option cost = option-adjusted spread – zero-volatility spread.

B)   option cost = option-adjusted spread – nominal spread.

C)   option cost = zero-volatility spread – option-adjusted spread.

D)   option cost = nominal spread – option-adjusted spread.

3.Using the pricing data for the two FNMA ARM securities given above, what is the option cost of each security if the effective durations of the two securities are equal?

A)   ARM A = 54 basis points; ARM B = 34 basis points.

B)   ARM A = 17 basis points; ARM B = 21 basis points.

C)   ARM A = 37 basis points; ARM B = 13 basis points.

D)   ARM A = 233 basis points; ARM B = 245 basis points.

4.In general, the investment team at Matrix attempts to buy “cheap” securities because they are undervalued on a relative basis. What is a characteristic of a “cheap” security for a given Z-spread and effective duration?

A)   Low OAS relative to the required OAS and low option costs.

B)   High OAS relative to the required OAS and high option costs.

C)   Low OAS relative to the required OAS and high option costs.

D)   High OAS relative to the required OAS and low option costs.

5.Which of the two bonds Woods is considering purchasing has the greater interest rate exposure?

A)   ARM A, because it has a larger duration.

B)   ARM B, because it has a smaller duration.

C)   The two ARMs have equal convexity measures, and therefore identical interest rate exposure.

D)   The interest rate exposure cannot determine without a specific measure of convexity.