GICs, BICs & Wraps
Fair Value Drivers:
- Term to Maturity
- Credit Risk
- Yield Curve
- Yield Spread
- Rate Guarantee
- Early Cash-Out Provision
- Value of Insurance
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Mortgage-Backed Securities
Fair Value Drivers:
- Loan term
- Scheduled monthly payment
- Estimated prepayment
- Credit enhancements
- Treasury spot rate curve
- Yield spread
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Asset-Backed Securities
Fair Value Drivers:
- Credit rating of issuer, bond class, and third-party guarantor
- Call provisions
- Senior/subordinate structure
- Cash flow waterfall
- Excess spread
- Estimated prepayments
- Performance of collateral
- Credit enhancements
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Pass-Throughs
Fair Value Drivers:
- Loan term
- Scheduled monthly payment
- Estimated prepayment
- Credit enhancements
- Treasury spot rate curve
- Yield spread
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Mezzanine Debt
Fair Value Drivers:
- Coupons
- Maturity
- Subordination terms
- Credit spread
- Interest rates
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Convertibles
Fair Value Drivers:
- Interest rates
- Credit spread
- Coupon
- Call provision
- Maturity
- Put provision
- Stock price
- Dividend yield
- Stock return volatility
- Liquidity (of convertible and stock)
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Distressed Securities
Fair Value Drivers:
- Firm value
- Principal amount of loan
- Stock return volatility
- Illiquidity discount
- Coupon and maturity
- Industry prospects and competition
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Collateralized Mortgage Obligations (CMO)
Fair Value Drivers:
- Tranche structure
- Loan terms
- Scheduled monthly payment
- Estimated prepayment
- Credit enhancements
- Treasury spot rate curve
- Yield spread
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Auction Rate Securities
Fair Value Drivers:
- Time remaining till next auction
- Changes in market’s required margin
- Credit spread
- Call provisions
- Liquidity risk
- Terms of collar
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Cash and Synthetic CDO & CDO² Tranches
Fair Value Drivers:
- Tranche structure
- Weighted average rating factor
- Asset management fees
- Coverage tests
- Performance of collateral
- Risk exposure of synthetic CDOs
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Credit Linked Notes
Fair Value Drivers:
- Loan terms (coupon, maturity, etc)
- Credit quality of issuer
- Collateral
- Default swap terms
- Recovery rate in case of default
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Structured Investment Vehicles
Fair Value Drivers:
- Term structure of interest rates
- Cash flows
- Credit quality of underlying assets
- Liquidity risks for underlying assets
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Exotic OTC Options
Fair Value Drivers:
- Value of underlying assets
- Option strike price
- Volatility of returns on underlying assets
- Interest rates
- Cash flow yield from underlying assets
- Expiration of option
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Complex, Illiquid Securities
Fair Value Drivers:
- Cash flows
- Illiquidity discount
- Underlying cash flow volatility
- Maturity structure
- Counterparty risk
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