(m) An investor has purchased the bottom tranche of a mortgage-backed security (MBS) con-sisting of 10 similar mortgages. This is the tranche that is first affected when one of themortgages that make up the MBS defaults, and thus the investor is particularly interestedin the first time T that one of the mortgages defaults.As a simplifying assumption, the investor assumes that the default times 71, ..., 710 of themortgages that make up the MBS are independent exponentially distributed with parameterA. Then the first-to-default time is T = min{71,..., 710}.By looking at historical data, the investor notes that five MBS with identical structure andcharacteristics had first-to-default timesT₁ = 1.2, T2=0.9, T3 = 2.1, T₁ = 1.5, T5 = 1.3.What is the maximum likelihood estimate estimate of X? Round your answer to 3 decimalplaces.[Hint: First compute the PDF of T.]

To solve this problem, we need to estimate the parameter 𝜆λ of an exponential distribution using…

Answered: (m) An investor has purchased the…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Vi (H X.) 25) A credit market instrument that pays the owner a fixed coupon payment every year until the maturity date and then repays the face value is called a A) fixed-payment loan. C) simple loan. B) coupon bond. D) discount bond. 25) Pr
K Fill in the blank to complete the sentence below. A(n) rate mortgage may be completely amortized at the initiation of the loan. adjustable high low fixed
Suppose that ABSS are created from portfolios of subprime mortgages with the following allocation of the principal to tranches: senior 80%, mezzanine 10%, and equity 10%. (The portfolios of subprime mortgages have the same default rates.) An ABS CDO is then created from the mezzanine tranches with the same allocation of principal. Losses on the mortgage portfolio prove to be 16%. What, as a percent of respective tranche principal, are losses on the mezzanine tranche of the ABS and ABS CDO. Select one alternative: 50% for ABS and 50% for ABS CDO 60% for ABS and 40% for ABS CDO 60% for ABS and 100% for ABS CDO 100% for ABS and 0% for ABS CDO
Suppose that ABSs are created from portfolios of subprime mortgages with the following allocation of the principal to tranches: senior 80%, mezzanine 10%, and equity 10%. (The portfolios of subprime mortgages have the same default rates.) An ABS CDO is then created from the mezzanine tranches with the same allocation of principal. Losses on the mortgage portfolio prove to be 16%. What, as a percent of tranche principal, are losses on the mezzanine tranche of the ABS CDO? (a)50% (b)60% c)80% (d)100%
can you may this calculations for each of my bonds?. For each of your bonds, calculate expected defavvult percent loss as = default probability* (1 - recovery rate ). You will need to use the default rates and recovery rates that match each bond's rating. 4. Calculate the overall expected loss to your portfolio as the weighted average of the expected default percent loss
An analyst estimates that the probability of default on a seven-year AA-rated bond is 0.06, while that on a seven-year A-rated bond is 0.13. The probability that they will both default is 0.04.a. What is the probability that at least one of the bonds defaults? (Round your answer to 2 decimal places.) b. What is the probability that neither the seven-year AA-rated bond nor the seven-year A-rated bond defaults? (Round your answer to 2 decimal places.) c. Given that the seven-year AA-rated bond defaults, what is the probability that the seven-year A-rated bond also defaults? (Round your answer to 2 decimal places.)
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Unlike the coupon interest rate, which is fixed, a bond's yield varies from day to day depending on market conditions. To be most useful, it should give us an estimate of the rate of return an investor would earn if that investor purchased the bond today and held it for its remaining life. There are three different yield calculations: Current yield, yield to maturity, and yield to call. A bond's current yield is calculated as the annual interest payment divided by the current price. Unlike the yield to maturity or the yield to call, it does not represent the actual return that investors should expect because it does not account for the capital gain or loss that will be realized if the bond is held until it matures or is called. This yield was popular before calculators and computers came along because it was easy to calculate; however, because it can be misleading, the yield to maturity and yield to call are more relevant. The yield to maturity (YTM) is the rate of return earned on a…
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Consider three bonds X, Y, and Z, each of which pays $1000 if it does not default, and nothing in case of default. The default probabilities are 0.3, 0.2, and 0.1 respectively, and the default correlations are all zero. These bonds are bundled together to form an asset pool, and a prioritized structure of claims (tranches) against this pool are issued. There are three tranches (senior, mezzanine, and junior), each of which promise $1000. If there are insufficient funds to make all promised payments, then all losses are applied first to the junior tranche, then to the mezzanine, and finally to the senior tranche. (a) Write down the list of all possible outcomes and identify which of these outcomes would cause the mezzanine tranche to default. (b) What is the default probabilty of the mezzanine tranche? (c) What is the expected value of payment for the mezzanine tranche?
D4) Finance An investor has two choices: a) Investing in a five-year bond and hold it for five years b) Investing in a two-year bond and reinvesting in a three year bond when it matures If the investor opts for choice a), he/she eliminates the following risk/s: Group of answer choices °price risk and currency risk °reinvestment risk and currency risk °interest rate risk and currency risk °reinvestment risk °None of the answers are correct

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