Reading 57: Valuing Mortgage-Backed and Asset-Backed Securit face, 2010, dealers, reported, effective

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Session 15: Fixed Income: Structured Securities
Reading 57: Valuing Mortgage-Backed and Asset-Backed Securities

LOS f: Discuss why effective durations reported by various dealers and vendors may differ.

 

 

 

The major differences in effective duration among analytical systems providers are attributable to all of the following assumptions EXCEPT:

A) mortgage-rate differences.

B) option adjusted spread (OAS) differences.

C) differences in changes in interest rates.

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Mortgage rate differences do not cause effective duration differences among analytical system providers.

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Which of the following is NOT a major reason why the effective durations reported by dealers and vendors can be very different?

A) Different option-adjusted spreads.

B) Differences in the assumption how yield volatility changes for shocks to the yield curve.

C) Differences in the relationship between short-term interest rates and refinancing rates.

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The major differences in the effective duration among analytical systems providers are attributable to differences in the following: the incremental change in interest rate, the prepayment model, the OAS, and the interest rate/refinancing rate spread assumption.

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Why do differences in the size of the rate shock produce different effective durations?

A) The price-yield relationship is convex.

B) The yield curve is not flat.

C) Different rate shocks result in different yield volatility changes.

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If the incremental change in interest rates is too large, the effects of convexity contaminate duration measurements.