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Answer: 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.
**B is correct.** **Analysis:** 1. **CPR Comparison:** - Given CPR of the MBS = 14.38% - Benchmark SMM = 0.85% - Convert SMM to CPR: CPR = 1 - (1 - SMM)^12 = 1 - (1 - 0.0085)^12 = 1 - (0.9915)^12 ≈ 9.74% - Since the mortgage's CPR (14.38%) is higher than the benchmark CPR (9.74%), the faster prepayment rate would result in a greater reduction in yield on the MBS compared to the benchmark security. 2. **DSCR Analysis:** - DSCR = Net operating income / Debt payments = 1,825,000 / 730,000 = 2.5 - The mortgage borrower's DSCR (2.5) is exactly the same as the benchmark DSCR (2.5) - Therefore, the mortgage borrower's ability to repay the loan is neither stronger nor weaker than that of a comparable benchmark obligor based on DSCR **Why other options are incorrect:** - **A:** Incorrect because higher CPR leads to higher yield reduction, not lower - **C:** Incorrect because DSCR is the same as benchmark, not stronger - **D:** Incorrect because DSCR is the same as benchmark, not weaker
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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 manager uses the following metrics as benchmarks for the commercial mortgage sector analysis:
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.