The "maturity date" for this security is shown as "10/01/2035". An investor in this security might be concerned about its very long maturity (30 years). Why is the maturity date a misleading measure of the security's maturity?
What will be an ideal response?
The maturity is misleading because of prepayments that, in essence, make the maturity less.
Not all of the mortgages that are included in the loan pool that are securitized need to have the same maturity. Consequently, when describing a pass-through security, the weighted-average maturity is determined. A weighted-average maturity (WAM) is found by weighting the remaining number of months to maturity for each mortgage loan in the pool by the amount of the mortgage outstanding. This measure is also referred to as the weighted average loan term (WALT). In conclusion, the stated maturity of a mortgage pass-through security is an inappropriate measure because of prepayments and for this reason market participants use two other measures: Macaulay duration and average life.
You might also like to view...
Which of the following is a current asset?
a. Building b. Office supplies c. Land d. Truck
American businessman King Gillette pioneered the sales model in which razor handles were given away for free or sold at a loss, but sales of disposable razor blades were very profitable. This is known as the _______ model
A) two-tiered pricing B) predatory pricing C) cross selling D) loss leading E) product churning
According to the text, a survey discloses that 31 percent of the respondents preferred the client's brand, while 30.8 percent preferred the closest competing brand
In such a case, it is perfectly fine to announce that the client's brand is the dominant brand. Such a situation would be ________. A) acceptable based on the facts of the survey B) acceptable if only the client was told this C) impossible to weigh in with a moral judgment based on these details D) unacceptable if only the client was told this E) unacceptable because it is misleading. The brands have virtual parity.
What is meant by the OLAP term: drill-down?