LiquidAssets10

The nominal spread is the spread between the cash flow yield and the yield on a Treasury security with the same maturity as the average life of the mortgage-backed security (MBS) or asset-backed security (ABS) under analysis. For MBS and ABS the nominal spread:

A) has nothing to do with prepayment risk.

B) assumes no prepayment risk.

C) masks the fact that a portion of the spread is compensation for accepting prepayment risk.

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For MBS and ABS, the nominal spread masks the fact that a portion of the spread is compensation for accepting prepayment risk.

LiquidAssets10

For a bond with an embedded option, if cash flows are independent of past interest rates, or not path dependent the:

A) Z-spread should be used with the binomial model.

B) option adjusted spread (OAS) should be used with the Monte Carlo simulation model.

C) option adjusted spread (OAS) should be used with the binomial model.

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If cash flows are independent of past interest rates, or not path dependent, the OAS should be used with the binomial model.