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LOS c: Describe path dependency in passthrough securities and the implications for valuation models.
Q1. Which of the following statements regarding a mortgage-backed security (MBS) is TRUE?
A) Backward induction methodology is useful for valuing MBS.
B) Binomial models should not be used for MBS because of path dependency.
C) Path dependency means that MBS prices tend to follow a trend.
Q2. Assume that interest rates in the year 2010 decrease below historical averages. They continue their downward trend for years 2011 and 2012. In which year would a MBS be least likely to be experience high rates of prepayment?
A) 2013.
B) 2010.
C) 2012.
Q3. Prepayment burnout in a mortgage-backed security (MBS) refers to the fact that:
A) some tranches will experience extreme rates of prepayment.
B) in the later years of a downward trend in interest rates, less mortgages will be refinanced.
C) eventually a MBS will exceed the maximum prepayments allowed when interest rates drop too low. | 
发表于 2009-3-26 16:21
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