Collateral mortgage obligations Essay Example | Topics and Well Written Essays - 16250 words

Collateral mortgage obligations - Essay Example This descriptive research aimed at studying the numerous valuation methodologies of prepayment speeds with Collateralized Mortgage Obligations (CMO) tranches in order to analyze the importance of these valuation methods in dealing with the complexities of the current economic scenes. The chief objective of the study mainly scrutinized the relevance of these CMOs to the current economic situations. Collateralized Mortgage Obligations have been referred to as claims that arise from cash flows from large pools of home mortgages. The CMOs are designed such that principals and interests once received from mortgage holders are distributed to the tranches. As debt derivatives, they provide retail and institutional investors the possibility of higher yields with a Standard & Poor ratings AA or AAA ratings. CMO present interest rate risk, as well as prepayment risk that make it very sensitive. The 2007 financial bubble was one of the reasons that led to the decline in CMOs due to their inabil ity to prevent the above mentioned risks. Therefore, the study set out to establish a standardized valuation model for CMO retail custodian platforms using historical data from FNMA, collection of empirical data from direct observation and unstructured questionnaires from the FINRA firms. From the investigation of the two major forms of valuation, namely ‘Fixed-rate mortgage’ and ‘adjustable –rate credit valuation’ methodologies, it was possible to actually determine a standard valuation of a five-tranche CMO that can be applied to the pricing model. This proposed quantitative descriptive research study discusses the various valuation methodologies of prepayment speeds with Collateralized Mortgage Obligations (CMO) tranches and analyzes the way the prevalent valuation methods are useful in current complex economic scenarios. The objective of this study is primarily to examine the applicability of various methods of valuation for pricing the CMOs so as to determine their