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Study Session 13: Fixed Income: Topics in Fixed Income Analysis

CMBS Balloon Payment Provision

Text says that if borrower is delinquent on a CMBS underlying loan and the lender is willing to extend the loan, balloon payment risk may be equal to all tranches because all loans must be refinanced to pay off the senior bondholders. 

Can someone provide clarifications on why senior bondholders (i.e. AAA rated tranche) have the same balloon payment risk as junior bondholders (i.e. B rated) when structuring refinancing, seniors are favored?

Fixed Income

Getting WORKED by the EOC questions in Fixed Income.  Anyone else think that schweser did a HORRIBLE job? I find myself having to read the text to even answer half the questions..

Seems like only the last few readings…

Average life of MBS


This is in reference to CFAI pg 343, Fixed Income. Says 

Avg life = sigma(1to t) of  t x proj principal received at t/ (12 x Tot principal)

So lets assume you plan on paying 1/12 every month, so proj principal/Tot equals 1/12. So then the formula is

Avg life = 1/ (12 x 12) sigma(1 to t) t 

which becomes

Avg life = 1/(12 x 12)    x t(t+1)/2

If you are paying 1/12the every month, t=12, so avg life is 0.54 yrs.

How do I make sense of the fact that 12 equal principal payments equals an avg life of 0.54?



Auto loans - amortising or non amortising?


I’ve heard different things about auto loans. Some people say that they are considered amortising loans and some people say that are non-amortising. What is the correct answer?

Reading 51, EOCQ 44

nvm, figured it out

wish I knew how to delete posts

Synthetic CDO


In a Synthetic CDO, I couldn’t understand why funding is not needed for senior tranch compared to junior/mezannine tranches.

Thanks for your time.

Mortgage Backed Sector of the Bond Market LOS


Reading 51 in the CFA book includes the topics such as Floating-Rate Tranches and Structured Interest-Only Tranches and these are not mentioned in the LOS for this reading. Do we need to know these?

Also, Would we need to know the formula for calculating the average life?

Thanks in advance!

Gotta love the outdated FI readings

Anybody else find it funny in the FI readings how they talk about how the U.S. doesn’t issue 30 year treasuries anymore?  Even though they started to in 2006 again.  Also how the parts on mortgage backed securities and CDO’s were written just before the housing bubble peaked or the financial crisis started.  Both were by Frank Fabozzi who probably has better things to do and are good readings, but it just seemed quite dated in my opionon.