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After the calculation of cash flow yield and the average life of the asset-backed and mortgage-backed security based on default, prepayment and recovery assumptions, the next thing to do is to compare the yield to a benchmark yield. Benchmark yield is the yield of treasury security which has the same maturity as the security's average life. Nominal spread is defined as the difference between cash flow yield and the yield of a comparable Treasury security. A normal spread has certain disadvantages. A part of nominal spread is compensation for accepting prepayment risk. Let us consider CMO support tranches that have been offered at a huge nominal spread. As we have seen earlier, nominal spread embodies substantial prepayment risk associated with support tranches. If a manager buys these CMO support tranches based on nominal spread, he will not succeed in determining whether or not the offered nominal spread is an adequate return given the substantial prepayment risk the support tranche holder has faced. Therefore, the manger should use measures like option-adjusted spread to indicate the potential compensation after adjusting for prepayment risk.
Define the balance of payments. Answer: The balance of payments that is abbreviated as BOP can be defined as the statistical record of a country’s international transactions ove
How are the members of the board of directors of a corporation chosen and to whom do these board members owe their primary allegiance? The Members of a corporation's board of d
How Debt securities is different from term loan Debt securities are different from term loans provided by financial institutions and banks to the company. Term loans are long t
E v aluation of bids and determination of the lowest evaluated responsive and qualified bidder You learnt how to receive and open bids in the previous sub section. Here you
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Internal Rate of Return (IRR) : This rate attempts to find the earnings rate, which equates the current value of the streams of earnings to the investment outlay. IRR is descri
Explain how management goals are incorporated into pro forma financial statements. Management locates a target goal, and forecasters produce pro forma financial statements within
Q. Diffrence between present values of future cash ? The difference among the present values of future cash inflows generated by an asset and its cost is known as net present v
(a) The calculation of the Weighted Average Cost of Capital (WACC) is theoretically easy but practically complex. Discuss. (b) Two-fifths of the total market value of Jefferson
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