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What factors determined the value of mortgaged backed securities and what are its
risk which made Banc One to shift to CMO? Also can any other instrument other than
CMO can be created to address the prepayment risk and what would be the risk
associated with this instrument.
Ans:
Weighted Avg Coupon: The weighted average coupon (WAC) is the weighted-
average interest rate of mortgages that underlie a mortgage-backed security
(MBS) at the time the securities were
Risk:
Prepayment Risk:- Prepayment risk is the risk involved with the premature
return of principal on a mortgage. A prepayment effectively renders the
borrower free of mortgage obligations. A mortgage prepayment option works
much like a call option for the borrower.
Briefly discuss about AIRS:- An amortizing swap is an interest rate swap where
the notional principal amount is reduced at the underlying fixed and floating rates.
Also called an amortizing interest rate swap, it is a derivative instrument in which
one party pays a fixed rate of interest while the other party pays a floating rate of
interest on a notional principal amount that decreases over time. The notional
principal is tied to an underlying financial instrument with a declining (amortizing)
principal balance, such as a mortgage. An amortizing swap is an exchange of
cash flows only, not principal amounts.
2. Briefly describe about the Qualitative, Hybrid & Statistical model of Credit Risk
Modelling and briefly state your judgement on the optimum model to be used by the
banks.
Ans:
3. What steps should be taken by the banking sector & RBI to overcome the recent
slowdown in the Automobile Sector.Can you suggest a policy to attract more FDI in
this sector.
Ans: