Sept 2008 2 vi

Would you pls explain what this means

"Creating tranches of stock that split principal payments by duration. In this way different tranches of stock are mapped to different points on the yield curve."

with respect to reducing prepayment risk of MBSs? esp. the bit about the yield curves- what does that imply?

 

It means the tranches are split by maturity, you have different maturities per tranche and hence diversify. Mortgages with 19 years to maturity are more likely to refinance that ones with 3 years to maturity.

Having different maturities per tranche helps diversify prepayment risk

 

Thank you! Good Luck for your exams!!!

 

Thanks, you too. You are surely too ready ahead May!

As a side Motivation remember in India Actuaries are not allowed to retire