This is with regards to reading 23, question 3 of the CFAI curriculum texts.
In calculating the risk premium approach yield for the 10 Year MBS the CFAI did not include either the maturity premium or callability premium.
Why is this?
Are these factors considered to be built into the prepayment risk spread? I got the question wrong because I included them, however, upon secondary examination I can intuitively see how they are related (prepayment risk is > than call risk but < maturity risk… all are positively correlated with interest rates, prepayment factor implies a shorter maturity than 10 years, etc).
I just want to make sure I have this concept locked down, I am typically pretty strong with the FI concepts.
Thanks.
In calculating the risk premium approach yield for the 10 Year MBS the CFAI did not include either the maturity premium or callability premium.
Why is this?
Are these factors considered to be built into the prepayment risk spread? I got the question wrong because I included them, however, upon secondary examination I can intuitively see how they are related (prepayment risk is > than call risk but < maturity risk… all are positively correlated with interest rates, prepayment factor implies a shorter maturity than 10 years, etc).
I just want to make sure I have this concept locked down, I am typically pretty strong with the FI concepts.
Thanks.