Reading 59: Valuing Mortgage-Backed and Asset-Backed Securit style, center, security, structure, 2011

土豆妮

Session 15: Fixed Income: Structured Securities
Reading 59: Valuing Mortgage-Backed and Asset-Backed Securities

LOS e: Evaluate a mortgage-backed security using option-adjusted spread analysis.

 

 

Wanda Brunner, CFA, is evaluating two tranches of a sequential-pay CMO structure.

Tranche	OAS (bps)	Z-spread (bps)	Effective duration
I	95	100	4.25
II	90	100	4.25

How should Brunner trade these CMO tranches?

A) Buy Tranche II and sell Tranche I.

B) Cannot be determined.

C) Buy Tranche I and sell Tranche II.

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Tranche I option cost = 100 – 95 = 5 basis points

Tranche II option cost = 100 – 90 = 10 basis points

Tranche I has a higher OAS and lower option cost than Tranche II, and the effective durations of the two tranches are equal. Therefore:

• Tranche I is undervalued on a relative basis (“cheap”), and she should buy it.
• Tranche II is overvalued on a relative basis (“rich”), and she should sell it.

土豆妮

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

A) small.

B) big.

C) zero.

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