Financial Risk Manager Part 2
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A fixed-income portfolio manager is conducting a performance analysis on an agency-MBS and the underlying pool of commercial mortgages. The manager obtains the following information:
The constant prepayment rate (CPR) of the commercial mortgages loan pool: 14.38%
Debt payments per year on the commercial mortgage loans: USD 730,000
Net operating income per year of the commercial mortgage property: USD 1,825,000
The manager uses the following metrics as benchmarks for the commercial mortgage sector analysis:
Debt service coverage ratio (DSCR) of a benchmark obligor: 2.5
Single monthly mortality (SMM) rate of a benchmark security: 0.85%
Which of the following statements is correct?
A
The prepayments on the commercial mortgage measured by the CPR shows that the reduction in yield on the MBS will likely be lower compared to that on a benchmark security.
B
The prepayments on the commercial mortgage measured by the CPR shows that the reduction in yield on the MBS will likely be higher compared to that on a benchmark security.
C
The estimated DSCR of the commercial mortgage implies that the mortgage borrower's ability to repay the mortgage loan is stronger than that of a comparable benchmark obligor.
D
The estimated DSCR of the commercial mortgage implies that the mortgage borrower's ability to repay the mortgage loan is weaker than that of a comparable benchmark obligor.