The result shows that duration remain the most important factor and that the OAS may mean revert
and may add value in subsequent months. Because the bond is a PAC protected by the supporting
tranches, there is no prepayment effect.
While a CMO structure can be complicated, we can analyze any bond by applying: the waterfall graph
(identifying the prepayment risk), the OAS analysis (measuring value and risk), return attribution
(relating performance to measures- a reality check). This process can apply to a bond or a portfolio.
Contact us if you have any questions, suggestions or comments. What would you like us
to discuss in coming issues? We look forward to hear from you.
Thomas Ho Company (THC) has decades of banking experience; a leading ALM solution for the banking community, sole
provider of risk modeling (NPV model) to OCC for seven years.
Thomas S.Y. Ho PhD, President of THC, senior consultant to federal regulatory agencies and senior consultant to enterprise
risk management departments of largest financial institutions 1999-2005.; elected member of the US Financial Economists
Roundtable; Board member of the Finance Mathematics Program, Courant Institute of Mathematics, New York University;
Research Professor at Owen School of Business, Vanderbilt University; nomination committee IAFE financial engineer of the
year. He was named one of the most prolific authors in finance based on a study by Cooley and Heck, (Journal of Finance, 2003).
Author of the Ho-Lee model (the first arbitrage-free stochastic interest rate model) and key rate durations (the widely used
interest rate risk measure for over $12 trillion assets.). Associate Editor of Journal of Derivatives and Journal of Investment
Management; co-authored four books and has published in major journals including Journal of Finance, Journal of Derivatives,
Journal of Fixed Income, and Journal of Portfolio Management. Books include The Oxford Guide to Financial Modeling,
Strategic Fixed Income Investments, Securities Valuation. Received his Ph.D. in Mathematics in 1978 from the University of
Pennsylvania, New York University's Stern School of Business as Professor of Finance from 1978 until 1990; full professor in
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