Explain why you agree or disagree with the following statement: “When the Monte Carlo simulation methodology is used to value a RMBS, a PSA assumption is employed for all interest-rate paths.”
Answer to relevant QuestionsAnswer the below questions. (a) What assumption is made about the OAS in calculating the effective duration and effective convexity of a RMBS? (b) Is it warranted? On July 1, 2013, the FHLMC 30-Year Generic 4% 2012 was analyzed using the Monte Carlo valuation model of FactSet. At the time of the analysis the security’s price was 104.644 with accrued interest of 0.300 (per $100 par ...Give two reasons why a CMO tranche is a path-dependent cash flow security. What is a cash flow arbitrage strategy involving convertible bonds? A portfolio manager currently has a portfolio consisting solely of investment-grade corporate bonds with an analytically computed duration of 6.6. The portfolio manager wants to sell 20% of the portfolio holdings and invest ...
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