Questions from General Investment

Q: Consider a single whole bond sequential CMO. It has two tranches

Consider a single whole bond sequential CMO. It has two tranches, an A-tranche and a Z-tranche. Explain how the payments are allocated to the two tranches. Which tranche is riskier?

Q: Explain in general terms how a protected amortization class (or PAC

Explain in general terms how a protected amortization class (or PAC) CMO works.

Q: Why is Macaulay duration an inadequate measure of interest rate risk for

Why is Macaulay duration an inadequate measure of interest rate risk for an MBS? Why is effective duration a better measure of interest rate risk for an MBS?

Q: What are some of the reasons that mortgages are paid off early

What are some of the reasons that mortgages are paid off early? Under what circumstances are mortgage prepayments likely to rise sharply? Explain.

Q: Evaluate the following argument: “Prepayment is not a risk to

Evaluate the following argument: “Prepayment is not a risk to mortgage investors because prepayment actually means that the investor is paid both in full and ahead of schedule.” Is the statement alway...

Q: Mortgage pools also suffer from defaults. Explain how defaults are handled

Mortgage pools also suffer from defaults. Explain how defaults are handled in a fully modified mortgage pool. In the case of a fully modified mortgage pool, explain why defaults appear as prepayments...

Q: Mr. Wall is a little confused over the relationship between the

Mr. Wall is a little confused over the relationship between the embedded option and the callable bond. How does the value of the embedded call option change when interest rate volatility increases? a....

Q: If VirtualCon had decided to slow its payment of accounts payable by

If VirtualCon had decided to slow its payment of accounts payable by 90 days instead of entering into a financing arrangement with the bank, what would be the impact on its operating cash flow (CFO) a...

Q: What happens to the stock price when the stock pays a dividend

What happens to the stock price when the stock pays a dividend? What impact does a dividend have on the prices of call and put options?

Q: Mr. Wall believes he understands the relationship between interest rates and

Mr. Wall believes he understands the relationship between interest rates and straight bonds but is unclear how callable bonds change as interest rates increase. How do prices of callable bonds react t...