An asset-backed security has the following expected monthly payments. The price of the security is $40,367,989.
Month	Payment	Month	Payment
1	$3,556,901	7	$3,527,427
2	$3,544,879	8	$3,524,660
3	$3,541,314	9	$3,521,945
4	$3,537,094	10	$3,518,657
5	$3,533,568	11	$3,515,078
6	$3,530,009	12	$3,507,323
(a) What is meant by an amortizing security?
(b) What are the three components of cash flow in an amortizing security? What assumptions typically are required to estimate the cash flows in an amortizing security?
(c) What is meant by the cash flow yield?
(d) Calculate the cash flow yield, expressed as an annualized rate based on monthly compounding.
(e) Convert the yield in (d) to a bond equivalent yield (i.e., an annualized rate based on semi-annual compounding.

Answer rating: 100% (QA)

a An amortizing security is a type of financial instrument where the principal amount is paid off gradually over time through a series of periodic pay... View the full answer