Auto loans - amortising or non amortising?

CFA Level II Fixed Income
#1

Hi

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?

Im under the impression that they are non-amortising as schweser says to use a Z-spread for spread analysis purposes (such as credit cards securities). If they were considered to be amortising however wouldn’t they have to be path dependent to use a OAS monte carlo analysis?

Also do we Use monte carlo OAS for High quality home equity or just OAS from binomial

Thanks in advance!

#2

Auto Loans are amortizing and even though it has a prepayment option, it’s usually not exercised so you can use the z-spread. You basically use the OAS monte carlo simulation for MBS and HEL. You would use OAS binomial model for a regular callable bond.

#3

Thanks Ishi93, legend!

#4

Hi Trogulj,

Just sharing this summary , it would help in valuing any security:

  1. Is there option embedded and execersible?

No: Use Z-Spread

Yes: Use OAS and Goto Question2 to decide model.

  1. Is the price path-dependent?

Yes: Use Binomial Model

No: Use Monte Carlo

#5

HI kyh, thanks for your help but I believe that you have the last two mixed up. You use Monte Carlo if it is path dependent otherwise Binomial

#6

Hi Trogulj,

Thanks for pointing that out! =) You’re right.