Reading 61: Valuing Mortgage-Backed and Asset-Backed Secu

答案和详解如下：

11.In regard to the effect of a change in the size of the rate shock on the duration and convexity estimates, Karstein is:

A)   incorrect in her analysis of the effect on both bonds.

B)   correct only in her analysis of the effect on the 4.75% 2010 bond.

C)   correct only in her analysis of the effect on the 5.85% 2025 bond.

D)   correct in her analysis of the effect on both bonds.

The correct answer was B)    

Duration and convexity estimates for bonds without embedded options will not be significantly affected by changing the size of the rate shock from 100 basis points to 50 basis points. However, for bonds with embedded options, the size of the rate shock can have a significant effect on the estimates.

We know from Part 3 that the 2025, 5.85% bond exhibits significant negative convexity, which is consistent with a callable bond. The 2010, 4.75% bond has positive convexity, even when yields are significantly below the coupon rate and the bond is trading at a substantial premium. That suggests the 2010, 4.75% bond has no embedded options.

We would expect that changing the size of the rate shock would have a significant effect on the 2025, 5.85% callable bond, but not on the 4.75% 2010 bond. Therefore, Karstein is correct in her analysis of the 4.75% bond, but not the 5.85% bond.

12.All of the following are limitations of the cash flow yield EXCEPT:

A)   it assumes cash flows will be realized.

B)   it assumes cash flows will be reinvested at the cash flow yield prevailing when the mortgage (MBS) or asset-backed security (ABS) is priced.

C)   the cash flow yield can never be as high as the comparable corporate bond yield due to prepayments.

D)   it is assumed that the MBS or ABS will be held to maturity.

The correct answer was C)

It assumes cash flows will be realized, that they will be reinvested at the cash flow yield prevailing when the MBS or ABS is priced and that the security will be held to maturity.

13.Which of the following is a limitation of the cash flow yield measure? The cash flow yield measure:

A)   assumes that the projected cash flows are reinvested at the cash flow yield.

B)   uses a 360-day year.

C)   assumes a flat yield curve.

D)   assumes that interest rates do not change over the life of the security.

The correct answer was A)

Cash flow yield has two major deficiencies: (i) it is implicitly assumed that the cash flows will be reinvested at the cash flow yield prevailing when the MBS or ABS is priced, and (ii) it is assumed that the MBS or ABS will be held until maturity.

14．Regarding the computation of the cash flow yield for an agency security, which of the following is the best reason why the assumption that the projected cash flows are actually realized is very restrictive?

A)   Spread risk.

B)   Default risk.

C)   Prepayments.

D)   Interest rate risk.

The correct answer was C)

Prepayments instill uncertainty into the assumed cash flows used to compute cash flow yield.

15．Which of the following is a difference between agency and nonagency mortgage-backed securities in the calculation of the cash flow yield? For nonagency mortgage-backed securities:

A)   the principal is variable.

B)   an assumption about default rates has to be made.

C)   the cash flow is unknown.

D)   an assumption about the prepayment rate has to be made.

The correct answer was B)

Nonagency mortgage-backed securities are not insured against default risk.