CFA Practice Question

There are 490 practice questions for this study session.

CFA Practice Question

When comparing an agency MBS with a non-callable corporate bond of equal legal maturity, which of the following statements would be false?
A. The average life of the MBS will be much shorter and its credit risk will be less.
B. The variability of cash flows received would be much higher with the MBS.
C. Given the same yields between the MBS and the corporate bond, the option-adjusted spread will be greater for the MBS.
Explanation: Option-adjusted spread (OAS) is the spread after stripping away the effects of call risk. Since the MBS has a greater degree of call risk, a much lower OAS will remain.

User Contributed Comments 3

User Comment
REITboy Can someone explain why A is true?
Nando1 The MBS can be paid off sooner while the non-callable bond cannot....Since it's an agency MBS (Fannie, Freddie, etc) it's regarded as having the backing of the US Gov (highest credit rating, less credit risk) vs. the non-callable bond.
siggarusfigs by the same "yields", it just means ytm, right? But the answer can only be true if the z-spreads are the same
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