Reading 45 - question 21 asks : which MBS should an investor of a savings and loans choose ( longer maturrity vs shorter maturity) that is a better off from an “Asset/Liability” perspective.
What do they mean by " Asset/liability" perspective??? I know it’s like saying from a balance sheet perspective… is that all?
Yea, pretty much hedging your asset/liability exposures.
Yeah, they want cash flows to match, so I bet the answer is on of the PAC’s, and not a Z or Support
The answer was a shorter maturity mbs
“Asset/Liability perspective” refers to asset/liability matching which is relevant for pension funds and defined benefit schemes.
“CMOs are securities issued against a pool of mortgages for which the cash flows have allocated to different classes called tranches. Each tranche has a different claim against the assets of the pool and a different mixture of extentsion and contraction risk. CMOs can be matched to the unique asset/liability needs of investors”.
thanks vicki!
Haven’t done this reading but S&L’s typically have short duration liabilities (customer deposits) and have long duration assets (home loans etc) so would prefer to have short duration securities in their investment portfolios.
no worries at all!