12. Mr. Wacker is a bond analyst whose primary responsibility has been to manage the corporate bond portfolio. Recently, his firm’s analyst responsible for the mortgage-backed securities portfolio left. Mr.Wacker was asked to monitor the mortgage-backed securities portfolio until an new analyst is hired. The portfolio contains only Ginnie Mae mortgage products. In reviewing the Ginnie Mae portfolio and the option-adjusted spread (OAS)

for each security, he was troubled by the values he observed. He was told that the benchmark interest rates used in the calculation of the OAS are Treasury rates. Below are two questions raised by Mr. Wacker. Respond to each one.

a. ‘‘I don’t understand why the Ginnie Mae securities in my portfolio have a positive OAS. These securities are backed by the full faith and credit of the U.S. government, so there is no credit risk. Why is there a positive OAS?’’

b. ‘‘There are different types of Ginnie Mae mortgage products in the portfolio. There are passthroughs, sequential-pay CMO tranches, planned amortization class CMO tranches, and support CMO tranches. Why do they have different OASs?’’