Session 15 - Fixed Income Structured Securities

Question 1

Single Monthly Mortality Rate (SMM)

Answer 1

1 – (1 – conditional prepayment rate) ^1/12

Question 2

Estimated Prepayment

Answer 2

SMM x (mortgage balance at beginning of month – scheduled principal payment for month m)

Question 3

Debt-to-Service Coverage Ratio

Answer 3

NOI / debt service

Question 4

Loan-to-Value Ratio

Answer 4

Current mortgage amount / current appraised value

Question 5

Absolute Prepayment Speed (ABS)

Answer 5

The measure of prepayments associated with securities backed by auto loans. It is calculated as the monthly prepayment expressed as a percentage of the value of the initial collateral.

Question 6

Cash Flow Yield

Answer 6

The discount rate that makes the price of a MBS or ABS equal to the PV of its cash flows.

Question 7

Bond-equivalent Yield

Answer 7

2[(1 + monthly cash flow yield)^6 - 1]

Question 8

Effective Duration

Answer 8

= (V- − V+) / (2V0(∆y))

Question 9

Effective Convexity

Answer 9

= (V- + V+ − 2V0) / (2V0(∆y)²)