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The Handbook of Fixed Income Securities, Eighth Edition, 8th Edition by Steven V. Mann, Frank J. Fabozzi

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CHAPTERFORTY-ONEVALUATION OF AGENCY MORTGAGE-BACKED SECURITIES

FRANK J. FABOZZI, PH.D., CFA, CPA

Professor of FinanceEDHEC Business School

SCOTT F. RICHARD, DBA

Practice Professor of FinanceWhartonUniversity of Pennsylvania

PETER RU

Director, Fixed Income Investment DepartmentMorgan Stanley Huaxin Fund Management Company Limited

The traditional approach to the valuation of fixed income securities is to calculate yield—the yield-to-maturity, the yield-to-call for a callable bond, and the cash-flow yield for a mortgage-backed security. A superior approach is the option-adjusted spread (OAS) method. Our objective in this chapter is to describe the OAS method as applied to mortgage-backed securities. At the end of the chapter, we apply the method ...

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