Q-2. Which of the following is an important risk to RMBS investors, but is not a
ID: 2784776 • Letter: Q
Question
Q-2. Which of the following is an important risk to RMBS investors, but is not a major concern for CMBS Investors? A. Default B. Prepayment C. Geographic concentration D. Property ages and lease expirations E. Legal structure and servicer relationships QUESTION-3. You are an investor in a PO security Now imagine prepayment rates increase after you purchased the PO and are higher that prepaym when the security was issued. Holding all else Equal, what will happen to the value of your investment? ent that was forecast A. Increase B. Decrease C. Stay the same D. The security will be worthless E. Cannot be determined from information given QUESTION-4. You have a 8 year bond with a par value of $1,000 that makes 7.15% annual coupon payments and the market discount rate is 6.70%. The bond has a Macaulay duration of 6.3856. Given this information, if the market yield increases by 20bp, what is the estimated percentage change in price of the bond? A. 1.20% B.-1.20% C. 1.28% D.-1.28% E. None of the aboveExplanation / Answer
1. Option B: prepayment
When compared to RMBS, CMBS provides lower risk of prepayment as commercial mortgages are often set for fixed term.
2. If prepayment rates increase, discount rate is lowered and hence the price would increase. Higher is the prepayment rate, faster is the repayment of principal, and hence higher the yield for investors.
3. Option B
Macaulay duration=6.3856
Modifide duration=Macaulay Duration/(1+yield)=6.3856/(1+6.7%)=5.98463
% change in price=Modified Duration*%change in yield=-5.98463*0.2=-1.1969%
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