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Valuation and Analysis of Collateralized Mortgage Obligations

Author

Listed:
  • John J. McConnell

    (Krannert Graduate School, Purdue University, West Lafayette, Indiana 47907)

  • Manoj Singh

    (Boston College, Chestnut Hill, Massachusetts 02167)

Abstract

This study develops a model for the valuation of Collateralized Mortgage Obligations (CMOs). The model is based on a two-factor model of the term structure of interest rates and embeds an empirically estimated mortgage prepayment function. The model is used to analyze various CMO tranches, including standard sequential pay fixed-rate tranches, Planned Amortization Class (PAC) tranches, Targeted Amortization Class (TAC) tranches, floating-rate tranches, Interest Only (IO) and Principal Only (PO) tranches, Z-bonds and Residuals. The results of this analysis illustrate the sensitivity of the various tranches to differences in CMO structure, changes in interest rates, the characteristics of the underlying collateral, and mortgage prepayments.

Suggested Citation

  • John J. McConnell & Manoj Singh, 1993. "Valuation and Analysis of Collateralized Mortgage Obligations," Management Science, INFORMS, vol. 39(6), pages 692-709, June.
    • Handle: RePEc:inm:ormnsc:v:39:y:1993:i:6:p:692-709
    DOI: 10.1287/mnsc.39.6.692
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    Citations

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    Cited by:

    1. Mark Broadie & Jerome B. Detemple, 2004. "ANNIVERSARY ARTICLE: Option Pricing: Valuation Models and Applications," Management Science, INFORMS, vol. 50(9), pages 1145-1177, September.
    2. Jean-David Fermanian, 2013. "A Top-Down Approach for Asset-Backed Securities: A Consistent Way of Managing Prepayment, Default and Interest Rate Risks," The Journal of Real Estate Finance and Economics, Springer, vol. 46(3), pages 480-515, April.
    3. Naoki Kishimoto, 2004. "Pricing Path-Dependent Securities by the Extended Tree Method," Management Science, INFORMS, vol. 50(9), pages 1235-1248, September.

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