Nominal Rates

CFA Level II
#1

Is prepayment risk taken into account when quoting nominal rates?

#2

WHAT

#3

Is prepayment risk taken into account when quoting nominal rates?

#4

WHAT

#5

WHAT they’re trying to say is that nominal rates have nothing to do with prepayment risk…

#6

Is this some kind of trick question?

#7

Maybe I didn’t phrase the question properly. Does the nominal spread, concerning a MBS, take into account that a certain number of mortgages will have prepayments and by adjusted accordingly? I would copy and paste the exact question but don’t have it with me. I asked a Financial Analyst at work and after some research he said yes.

#8
  1. You didn’t phrase correctly, we all thought you meant nominal rate (i.e. real rate + inflation = nominal rate). 2) No it does not take prepayment into consideration. That is the whole weakness of the nominal spread–it does not remove or take any consideration of prepayment risk within the spread.