Nmims Assignment Help Service One of the most common measu

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Fixed Income Securities and Analysis - I

1. Olive and Smith were arguing over the difference between the CMBS and RMBS.
Olive argued that the only difference in the CMBS and RMBS is in terms of the underlying loans while Smith argued that the two differs in terms of the structure and call protection measures. Provide a detailed argument on behalf of Smith. (10 Marks)

2. One of the most common measures of estimating the changes in the bond prices due to the change in the underlying yield-to-maturity of the bond is Macaulay Duration. While it is argued that Macaulay Duration is not an appropriate way of forecasting the change in the bond prices for large change in the bond s YTM. Prove the above statement with the help of a numerical example. Also, mention which other duration measure would be a better approximation than Macaulay Duration along the with numerical proof based upon the example taken earlier. (10 Marks)

3.a. A 10% U.S. corporate bond is priced for settlement on July 15, 2022. The bond makes semiannual coupon payments on Feb 15 and Aug 15 of each year and matures on Aug 15, 2027. The bond uses the 30/360 day-count convention for accrued interest. Calculate the full price, the accrued interest, and the flat price per USD 100 of par value for stated annual yields-to-maturity of 12%. (5 Marks)

3.b. Diana was having an argument with Steve that duration alone is a very good measure for estimating the changes in the bond prices due to the changes in the yield-to-maturity (YTM). While Steve argues that duration alone is not an accurate way of measuring the changes in the bond prices due to the changes in the underlying YTM of the bond. Out of both statements, which statement is correct and why. Please provide the explanation as well. (5 Marks)

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