Hi all!
I can’t understand the answer for EOC Reading 18 question # 3A. Why was 1.0% spread of 10yr gov’t over 1yr gov’t was added to the Corporate bond, but to the MBS bond. As I understand, this spread represents a maturity risk.
Can some of you please explain?
Many thanks!
please read the fine print below the question.
was confused on this too. what a stupid fine print note to add, IMO. thanks cpk
Fell in the same trap… seems to me like adding ‘’(over 10-year Treasuries)’’ implicitly means that one has to add the 1% spread of the 10-year over 1-year Treasury note to the expected return of the 10-yr MBS… I still don’t get it…
This tripped me up as well. The footnote says “This spread implicitly includes a maturity premium in relation to the 1-year T-note as well as compensation for prepayment risk.” That is gibberish. If it has a “maturity premium” then why does the question say “10-year MBS prepayment risk spread (over 10-year Treasuries)”, why not just say “over 1-year T-note”? Dumbasses.