McLeod81 Wrote: ------------------------------------------------------- > over05 Wrote: > -------------------------------------------------- > ----- > > What is the answer for that one, when is PO has > > highest return or value? That one is tough for > > me…I think I chose B which says > > something…can’t remember. > > > Immediately. If it pays off 5% in one day, the > annualized return is 1.05^365 same here
guys definition of cmo was not correct it had cfs from mortgage going straight to tranches… not true they go thru mps first
avg life went down PAC A gets 32+int payment of accrual so 40750 or something.
dirtydirty Wrote: ------------------------------------------------------- > guys definition of cmo was not correct it had cfs > from mortgage going straight to tranches… not > true they go thru mps first crap that’s what I thought first and then changed my mind
Why would it pay off immediately? Because borrower can get lower rate. If borrower can get lower rate, then reinvestment of return is at a lower rate. So if you get 5% immediately, you have to reinvest at a lower rate. If it pays off faster than expected rate you have the same problem. If it pays of slower than expected and its principal only, you have some default, so that’s a bad return. I chose if payed at expected rate. Could be wrong, but that was my thinking.
PO the faster you pay the higher return they get. So if you pay it now, then PO will get highest return. IOs gains when interest rates go higher.
but ios do exhibit neg convexity right? that question freaked me out because of the immediaelly after issuance line… but thinking about tit now that was just to avoid any complexity regarding prior prepayments…
dirtydirty Wrote: ------------------------------------------------------- > guys definition of cmo was not correct it had cfs > from mortgage going straight to tranches… not > true they go thru mps first This question sucks. You are right dirtydirty, but if you read the CFAI text it says word for word what the guy in the vignette says, making that question correct. that really pissed me off when I read that. Also I put 32k for the payment to tranche A, and again if you read CFAI text it says that the accruals interest due is not paid and instead, added to the “principal portion” of the highest remaining tranche
IO’s go up in price when interest rates rise, until rates reach a certain level and then they start to act more like bonds (decrease when rates rise).
well that is just flat out wrong and they will have to throw that question out i would assume…
like how do they account for the servicing fees on the mps then? they just magically dissappear? i’m going to email cfa on this one
mcleod, I thought they were testing prepayment burnout, so I though d, ios decrease when rates decrease and decrease less as rates decline more
Its because he specifically states “mortgage related products” which in turns actually means MBS passthroughs I guess.
Cant you report question errors?
heh thats dirty
dirtydirty Wrote: ------------------------------------------------------- > well that is just flat out wrong and they will > have to throw that question out i would assume… No it’s not. IO’s inrease as rates rise because it extends the period of interest payments with (lower prepay). When rates are extremely high (ie 15%), the payments aren’t extending any longer because people are no less likely to refinance at 16% than at 15%. BUT the interest payment is less valuable because it is far below the current rates. As far as PO’s go, your return is higher the faster it’s paid off. The fastest anything could ever be paid off is immediately. There is nothing preventing someone to refinance their mortgage the next day if they chose to do so, whether or not it’s likely is another matter.
mcleod was talking about the cmo statement
Gotchya.
dirtydirty Wrote: ------------------------------------------------------- > guys definition of cmo was not correct it had cfs > from mortgage going straight to tranches… not > true they go thru mps first The definition is word for word what was in the secret sauce book - I haven’t looked up the CFAI book yet, but I would imagine they are the same.
then why have the no, they go thru mps option lol