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MBS are the most complicated securities that are sensitive to interest rates. The factors that affect the price of MBS are varied and most of them are difficult to model to an accurate degree. Though prepayment behavior is an essential part of any MBS, it actually depends on the economic conditions and the present level of interest rates. Low interest rates may induce borrowers to prepay the mortgage so that they can refinance their property at a lower rate. However, in case of a mortgage pool, each and every house/property owner may prepay when the call option is in the money. In such case, the interest rate is related to the tendency to prepay. Generally, the share of mortgage that is prepaid in a period is inversely related to the level of interest rates.
How would you explain economic exposure to exchange risk? Answer: Economic exposure can be illustrated as the opportunity that the firm’s cash flows and so its market value may
A floater where the coupon rate is computed as a fraction of the reference rate plus a quoted margin, are known as a de-leveraged floater. The general formula for this
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1. An investor is thinking of investing in a recurring deposit scheme that offers an interest rate of 12% per annum. The investment that he is planning is for the higher education
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The fundamental principle is that when a tree is used to value an on-the-run issue, the resulting value should be arbitrage free i.e., it should be equal to the o
How has the merger activity in the past decade affected the concentration of assets in the banking industry? A: Over the last decade, some commercial banks declined by twenty-o
There is some discussion on whether Multinational Corporations (MNC's) enhance risk when borrowing foreign currencies. Those in favor of borrowing state that lower costs of financi
Borrowing Funds to Purchase Bonds There are several sources available to borrow funds. When securities are purchased with borrowed funds then the mo
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