Explain why you agree or disagree with the following statement: “An investor should be unwilling to pay more than the call price for a bond that is likely to be called.”
Answer to relevant QuestionsIn Robert Litterman, Jose Scheinkman, and Laurence Weiss, “Volatility and the Yield Curve,”Journal of Fixed Income, (Premier Issue, 1991), p. 49, the following statement was made: “Many fixed income securities (e.g., ...“The option-adjusted spread measures the yield spread over the Treasury on-the-run yield curve.” Explain why you agree or disagree with this statement. Does a callable bond exhibit negative or positive convexity? In a well-protected PAC structure, what would you expect the distribution of the path present values and average lives to be compared to a support bond from the same CMO structure? What assumptions are required to assess the potential total return of a RMBS?
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