Approaches to valuing asset-backed securities, Financial Management

There are two approaches to value Asset-Backed Securities. They are:

  1. Zero-Volatility Spread (Z-spread) Approach.

  2. Option-Adjusted Spread (OAS) Approach.

The Z-spread approach uses the spot interest rate plus zero-volatility spread to discount the cash flows and arrive at the value of Asset-Backed Securities. This approach does not consider the prepayment option. Therefore, it is suitable for characteristic a type of Asset-Backed Securities. Characteristic b type of Asset-Backed Securities also could be valued using Z-spread approach. Though the borrower in this type of Asset-Backed Securities has an option of prepayment he does not want to utilize it. Therefore, this makes the Z-spread equal to OAS. Characteristic c type of Asset-Backed Securities is valued using OAS approach. We can either use binomial model or the Monte-Carlo simulation model. Like mortgage-backed securities, even in asset-backed securities with prepayment option, the cash flow is interest rate path dependent. Therefore, the Monte-Carlo simulation model is used.

Posted Date: 9/10/2012 9:02:09 AM | Location : United States







Related Discussions:- Approaches to valuing asset-backed securities, Assignment Help, Ask Question on Approaches to valuing asset-backed securities, Get Answer, Expert's Help, Approaches to valuing asset-backed securities Discussions

Write discussion on Approaches to valuing asset-backed securities
Your posts are moderated
Related Questions
5 Define risk. Examine the need for assessing the risks in a project.

Q. Graphic Presentation of Net Operating Income Approach ? Graphic Presentation of NOI (Net Operating Income) Approach: - NOI (Net Operating Income) approach is explained graph

Evergreen Company Ltd has been promoted by promoters. They are trying to decide how the company could be financed. There are three choices: i. Issue Rs 500,000 in Equity shares

Determination of values The values for which NPV turns into zero are found by calculating the break-even values for the selected variables. Once determined these give an indica

Assume you are a professional financial analyst working for a wealthy investor.  Your client has $2.6 million to invest and wants to sink it into a single stock (diversification is

Explain Hard capital rationing and Soft capital rationing The NPV decision rule to admit all projects with a positive net present value requires the existence of a perfect cap

Determine in brief about Venture capitalists Venture capitalists are organisations which take on risky business ventures. They provide finance for and generally require a high

38. The optimum capital structure is the one with i) highest value of the firm ii) Lowest value of the firm iii) highest shares in numbers iv) highest debt

What is Benchmarking "A continuous, systematic process for evaluating the products, services and work processes of an organisation that are recognised as representing best prac

If a credit manager experience no bad debt losses over the past year. Would this be an indication of proper credit management? Why or why not