Reading 59: Valuing Mortgage-Backed and Asset-Backed Securiti like, mortgage, speaking, adjusted, would

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

Q1. Generally speaking, an analyst would like the adjusted spread (OAS) to be:

A)   small.

B)   zero.

C)   big.

 

Q2. A collateralized mortgage obligation (CMO) bond structure includes three tranches, A, B, and C, with the following characteristics:

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

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

A)   B.

B)   A.

C)   C.