Already have an account? Get multiple benefits of using own account!
Login in your account..!
Remember me
Don't have an account? Create your account in less than a minutes,
Forgot password? how can I recover my password now!
Enter right registered email to receive password!
These securities aid in unpacking the cash flows from a pass-through. The most uncomplicated stripped mortgage-backed securities are the PO-IO-security. Unlike a pass-through security which distributes the entire cash flows in equal proportion to all investors, the (principal only) PO-IO (interest only) creates two securities. The PO-IO aid in hedging, interest rate and prepayment risks.
The POs get all the principal flows from each mortgage payment. They are sold at a significant discount to par. The cash flows typically are low in the beginning which increase with time as the principal component of the mortgage payment grows. The PO investor receives the entire par value of the PO .
The IOs get all the interest flows from each payment. The cash flows are very huge in the beginning and get smaller with passage of time. Therefore, they have a shorter life. The IO strips have the risk of receiving cash flows with low value than expected because the interest produced depends on the beginning-of-month balance of the pool. The IO investors may end up with cash flows in falling interest rate scenario as the mortgage rate will be paid off sooner than estimated.
Investment Characteristics of POs and IOs:
The investment performance of POs is highly sensitive to the prepayment rates. As prepayment rates rise with a decline in mortgage rates, prices of POs increase as interest rates fall.
The price of an IO security is positively related to the mortgage rates at low existing levels. A decline in market rates below that of the mortgage rates results in an increase in the prepayment rates and a fall in principal amounts. Interest payments to the IO fall as they are based on the principal outstanding on the underlying pool. The cash flows to the IOs improve when the interest rates increase above the contract rate.
Unlike pass-through securities, POs and IOs demonstrate higher price volatility, since the returns on these stripped securities are negatively correlated, that is, their prices move in a direction opposite to that of the interest rates. However, their combined volatility is equal to the price volatility of the pass-through security.
a-ii, should i calculate the co-variance of the 30 securities?
Method to Identify the Component of Seasonal Variation in a Time Series This technique is called as Ratio to Moving Average Method. In this technique, we construct an index wh
Q. How are LIBOR, TIBOR and EURIBOR determined? London Inter Bank Offered rate ( LIBOR) and is the rate of interest at which banks offer funds to other banks in marketable siz
Honey Well company is contemplating to liberalize its collection effort. It''s present sales are 1000000 and it''s average collection period is 30 days, it''s expected variable c
Long-Term Solvency Ratios (Financial Leverage Ratios) Debt-Equity Ratio = Total Debt / Total Equity à It is a measure of a company's debt utilization. It gives the ex
a) A niche market refers to a lucrative and small market segment. Marketing strategy is targeted and concentrated at this specific market segment. Pink Ladies are specifically targ
Have the large bank holding companies increased their market share at the expense of smaller institutions? A: No. A study conducted by the Federal Reserve Bank of New York reve
Cost of Retained earnings (K ) Retained earnings are that portion of EPS that is retained by the firm. This may be measured as the rate of return which the existing share hol
#
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
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!
whatsapp: +1-415-670-9521
Phone: +1-415-670-9521
Email: [email protected]
All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd