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.
which type of financing is appropriate to each firm
Accounting Framework - Convention of Materiality Materiality means relative significance. In other words whether a matter should be disclosed or not in the financial statement
Settlement of the Index Options Contract In the index options contract, the premium to be paid or to be received is calculated for each CM after netting the positions at the en
Milan Corporation is interested in buying a machine that will cost $50,000, and it will depreciate it on straight-line basis over a 5-year period. The machine is expected to last f
Question 1: i) Performance budgeting is the best budgeting system. Discuss. ii) Why there is a need for implementing MTEF in the Mauritian Public Sector? Questi
Q. Example to show the companys current gearing? The company's current gearing 2000/ 8500 × 100 = 23.53% The current gearing position is on the low side particularly wh
A firm has net working capital of -$800. Long-term debt is $15,400, total assets are $24,800 and fixed assets are $19,100. What is the amount of the total liabilities.
This is the part of after-tax personal income that is not spent.
1. Using ratio analysis, compare your fifth year to the current year and discuss. 2. Compute the expected stock price at the end of the fifth year. Assume your stockholders hav
Foreign Exchange Market Equilibrium: We say that the foreign exchange market is in equilibrium when deposits of all currencies oer the same expected rate of return (when retu
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