Approaches to valuing asset-backed securities, Financial Management

Assignment Help:

There are two approaches to value Asset-Backed Securities. They are:

  1. Zero-Volatility Spread (Z-spread) Approach.

  2. Option-Adjusted Spread (OAS) Approach.

The Z-spread approach uses the spot interest rate plus zero-volatility spread to discount the cash flows and arrive at the value of Asset-Backed Securities. This approach does not consider the prepayment option. Therefore, it is suitable for characteristic a type of Asset-Backed Securities. Characteristic b type of Asset-Backed Securities also could be valued using Z-spread approach. Though the borrower in this type of Asset-Backed Securities has an option of prepayment he does not want to utilize it. Therefore, this makes the Z-spread equal to OAS. Characteristic c type of Asset-Backed Securities is valued using OAS approach. We can either use binomial model or the Monte-Carlo simulation model. Like mortgage-backed securities, even in asset-backed securities with prepayment option, the cash flow is interest rate path dependent. Therefore, the Monte-Carlo simulation model is used.


Related Discussions:- Approaches to valuing asset-backed securities

Stabilization policies in the aa-dd model, Stabilization Policies in the AA...

Stabilization Policies in the AA-DD Model. Suppose the economy of Zion has reached the long run equilibrium (i.e. full employment). Now assume that a best-seller, written by Ne

What is a marginal cost of capital schedule (mcc), What is a marginal cost ...

What is a marginal cost of capital schedule (MCC)?  Is the schedule always a horizontal line?  Explain. The marginal cost of capital schedule is a graphic representation of the

Automatic reinvestment plan, Automatic Reinvestment Plan Like in the US...

Automatic Reinvestment Plan Like in the US, UTI India has also started this plan where the amount of dividend and other income accrued on mutual fund investments is automatical

Dividend payout ratio, Dividend Payout Ratio The percentage of earnings...

Dividend Payout Ratio The percentage of earnings or profit paid to shareholders in dividends. Computed as:   The payout ratio gives an idea about how well earning

Gold standard, what is the traditional gold standard? and how does it diffe...

what is the traditional gold standard? and how does it differ from our current monetary system.

What are the main criticisms of the payback method, How do we calculate the...

How do we calculate the payback period for a proposed capital budgeting project?  What are the main criticisms of the payback method? We calculate the reimbursement period for

Accumulation option, It is a policy feature of permanent life insurance tha...

It is a policy feature of permanent life insurance that permits policyholders to left any dividends obtained with the insurer, where the dividends can gain interest. Accumulation o

What do you mean by collateralized mortgage obligation, Q. What do you mean...

Q. What do you mean by Collateralized Mortgage Obligation? Collateralized Mortgage Obligation (CMO) - SECURITY whose cash flows equal the difference between cash flows of colla

Calculate the required return - maintenance & other expense , An asset need...

An asset needed by the ABC Corp. can be purchased for $100,000.  Maintenance and other ownership expenses will total $20,000 each year for the asset's expected 10-year life. On the

Cross-sector analysis, Cross-Sector Analysis: The growth of a country d...

Cross-Sector Analysis: The growth of a country depends upon how fast a country can adapt to deregulation and internationalization. Deregulation and internationalization put com

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd